**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-K**


x ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934


**FOR
      THE FISCAL YEAR ENDED JULY 31, 2008**


 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





**Commission
      File No. 0-13078**





**CAPITAL
      GOLD CORPORATION**


(Exact
      name of registrant as specified in its charter)





**State
                of Delaware**
            
            **13-31805030**(State
                or other jurisdiction of
            
            (I.R.S.
                EmployerIncorporation
                or organization)
            
            Identification
                No.)





**76
                Beaver Street, 14th Floor, New York, New York**
            
            **10005**(Address
                of principal executive offices)
            
            (Zip
                Code)





**Registrant’s
      telephone number, including area code: (212) 344-2785**





Securities
      registered under Section 12(b) of the Exchange Act: none


Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, par value
      $.0001 per share





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes࿠ No x





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
      (or such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days.
      YES x NO  ̈





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulations S-K is not contained herein, and will not be contained, to the
      best
      of the registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      definition of "large accelerated filer,” “accelerated filer" and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


 ̈Large accelerated filer
            
             ̈Accelerated filer ̈Non-accelerated filer
            
            xSmaller Reporting Company





Indicate by check
      mark whether the registrant is a shell company (as defined in Rule 12b-2 of
      the
      Exchange Act).


Yes  ̈ No x





The
      aggregate market value of the voting and non-voting common equity on January
      31,
      2008 held by non-affiliates computed by reference to the closing price of the
      issuer’s Common Stock on that date, was $93,983,205 based upon the closing price
      ($0.70) multiplied by the 134,262,150 shares of the issuer’s Common Stock held
      by non-affiliates.





The
      number of shares outstanding of each of the issuer’s classes of common equity as
      of October 24, 2008: 192,974,824.


DOCUMENTS
      INCORPORATED BY REFERENCE: None.











CAPITAL
      GOLD CORPORATION


Form
      10-K


July
      31,
      2008


Table
                      of Contents
                  
                  PageGlossary
                  
                  
                  (iii)Part
                      IItem
                      1.
                  Business.
                  
                  1Item
                      1A.
                  Risk
                      Factors.
                  
                  3Item
                      1B.
                  Unresolved
                      Staff Comments.
                  
                  10Item
                      2.
                  Property.
                  
                  10Item
                      3.
                  Legal
                      Proceedings.
                  
                  18Item
                      4.
                  Submission
                      of Matters to a Vote of Security Holders.
                  
                  18Part
                      IIItem
                      5.
                  Market
                      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                      Purchases of Equity Securities.
                  
                  18Item
                      6.
                  Selected
                      Financial Data.
                  
                  21Item
                      7.
                  Management's
                      Discussion and Analysis of Financial Condition and Results
                      of
                      Operations.
                  
                  22Item
                      7A.
                  Quantitative
                      and Qualitative Disclosure About Market Risk
                  
                  38Item
                      8.
                  Financial
                      Statements and Supplementary Data.
                  
                  40Item
                      9.
                  Changes
                      in and Disagreement with Accountants on Accounting and Financial
                      Disclosure.
                  
                  40Item
                      9A
                  Controls
                      and Procedures.
                  
                  40Item
                      9B
                  Other
                      Information.
                  
                  41Part
                      IIIItem
                      10.
                  Directors,
                      Executive Officers and Corporate Governance.
                  
                  41Item
                      11.
                  Executive
                      Compensation.
                  
                  46Item
                      12.
                  Security
                      Ownership of Certain Beneficial Owners and Management and Related
                      Stockholder Matters.
                  
                  55Item
                      13.
                  Certain
                      Relationships and Related Transactions and Director
                      Independence.
                  
                  58Item
                      14.
                  Principal
                      Accountant Fees and Services.
                  
                  59Part
                      IVItem
                      15.
                  Exhibits
                      and Financial Statement Schedules.
                  
                  60Signatures
                  
                  64Supplemental
                      Information
                  
                  N/AFinancial
                      Statements
                  
                  F-1


ii





**GLOSSARY
      OF TECHNICAL TERMS**





Reserve:
            
            That
                part of a mineral deposit which could be economically and legally
                extracted or produced at the time of the reserve determination. Reserves
                must be supported by a feasibility study done to bankable standards
                that
                demonstrates the economic extraction ("Bankable standards" implies
                that
                the confidence attached to the costs and achievements developed in
                the
                study is sufficient for the project to be eligible for external debt
                financing.) A reserve includes adjustments to the in-situ tonnes
                and grade
                to include diluting materials and allowances for losses that might
                occur
                when the material is mined.Proven Reserve:
            
            Reserves
                for which (a) quantity is computed from dimensions revealed in outcrops,
                trenches, workings or drill holes; grade and/or quality are computed
                from
                the results of detailed sampling and (b) the sites for inspection,
                sampling and measurement are spaced so closely and the geologic character
                is so well defined that size, shape depth and mineral content of
                reserves
                are well-established.Probable Reserve:
            
            Reserves
                for which quantity and grade and/or quality are computed from information
                similar to that used for proven (measured) reserves, but the sites
                for
                inspection, sampling, and measurement are farther apart or are otherwise
                less adequately spaced. The degree of assurance, although lower than
                that
                for proven reserves, is high enough to assume continuity between
                points of
                observation.Mineralized Material
            
            The
                term “mineralized material” refers to material that is not included in the
                reserve as it does not meet all of the criteria for adequate demonstration
                for economic or legal extraction.Non-reserves
            
            The
                term “non-reserves” refers to mineralized material that is not included in
                the reserve as it does not meet all of the criteria for adequate
                demonstration for economic or legal extraction.Exploration Stage
            
            An
                “exploration stage” prospect is one which is not in either the development
                or production stage.Development Stage
            
            A
                “development stage” project is one which is undergoing preparation of an
                established commercially mineable deposit for its extraction but
                which is
                not yet in production.  This stage occurs after completion of a
                feasibility study.Production Stage
            
            A
                “production stage” project is actively engaged in the process of
                extraction and beneficiation of mineral reserves to produce a marketable
                metal or mineral product.


iii





**ADDITIONAL
      DEFINITIONS**





Caliche:
            
            Sediment
                cemented by calcium carbonate near surface.Diorite:
            
            Igneous
                Rock (Rock formed from magma or molten rock).Dore:
            
            Bars
                of low purity precious metal (Gold & Silver) which represents final
                product of a gold mine typically weighing 25 kg per
                bar.Dikes:
            
            Tabular,
                vertical bodies of igneous rock.Fissility:
            
            Shattered,
                broken nature of rock.Fracture
                Foliations:
            
            Fracture
                pattern in rock, parallel orientation, resulting from
                pressure.Heap
                Leaching:
            
            Broken
                and crushed ore on a pile subjected to dissolution of metals by leach
                solution.HydrometallurgicalPlant:
            
            A
                metallurgical mineral processing plant that uses water to leach or
                separate and concentrate elements or minerals.Intercalated:
            
            Mixed
                in.Litho
                static Pressure:
            
            Pressure
                brought on by weight of overlaying rocks.MajorIntrusive
                Center:
            
            An
                area where large bodies of intrusive igneous rock exist and through
                which
                large amounts of mineralizing fluids rose.Mesothermal:
            
            A
                class of hydrothermal ore deposit formed at medium temperatures and
                a
                depth over one mile in the earth’s crust.MicroporphyriticLatite:
            
            Extremely
                fine grained siliceous igneous rock with a distribution of larger
                crystals
                within.Mudstone:
            
            Sedimentary
                bed composed primarily of fine grained material such as clay and
                silt.PPM:
            
            Part
                per million.Pyritized:
            
            Partly
                replaced by the mineral pyrite.Reverse
                CirculationDrilling
                (or R.C.Drilling):
            
            Type
                of drilling using air to recover cuttings for sampling through the
                middle
                of the drilling rods rather than the outside of the drill rods, resulting
                in less contamination of the sampled
                interval.


iv





Sericitized:
            
            Rocks
                altered by heat, pressure and solutions resulting in formation of
                the
                mineral sericite, a very fine grained mica.Siltstone:
            
            A
                sedimentary rock composed of clay and silt sized
                particles.Silicified:
            
            Partly
                replaced by silica.Stockwork
                Breccia:
            
            Earth's
                crust broken by two or more sets of parallel faults converging from
                different directions.Stockwork:
            
            Ore,
                when not in strata or in veins but in large masses, so as to be worked
                in
                chambers or in large blocks.Surface
                Mine:
            
            Surface
                mining by way of an open pit without shafts or underground
                working.




v




**PART
      I**





**Item
      1.** **Business**





**Sonora,
      Mexico Concessions**





El
      Chanate





Through
      wholly-owned subsidiaries, Capital Gold Corporation owns 100% of 16 mining
      concessions located in the Municipality of Altar, State of Sonora, Republic
      of
      Mexico totaling approximately 3,544 hectares (8,756 acres or 13.7 square miles).
      We commenced mining operations on two of these concessions in late March 2007
      and achieved gold production and revenue from operations in early August 2007.
      We sometimes refer to the operations on these two concessions as the El Chanate
      Project. Our results of operations differ from preceding periods because we
      now
      are realizing revenue from operations.





On
      August
      30, 2007, Independent Mining Consultants, Inc. (“IMC”) of Tucson, AZ delivered
      to us an updated resource block model and an updated mine plan and mine
      production schedule (the “2007 Report”). The original feasibility study (the
“2003 Study”) on the El Chanate Project was prepared by M3 Engineering of Tucson
      in August 2003. M3 updated the 2003 Study in October 2005 (the “2005 Study”). An
      August 2006 technical report from SRK Consulting, Denver, Colorado (the “2006
      Update”) further updated the feasibility study.





According
      to the 2007 Report, our proven and probable reserve tonnage increased by
      approximately 98 percent from 19.9 million to 39.5 million metric tonnes with
      a
      gold grade of 0.66 grams per tonne (43.5 million US short tons at 0.019 ounces
      per ton). The open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one
      tonne of ore). The updated pit design for the revised plan in the 2007 Report
      is
      based on a plant recovery of gold that varies by rock types, but is expected
      to
      average 66.8%. A gold price of US$550 (three year average as of July 31, 2007
      as
      determined by IMC) per ounce was used to re-estimate the reserves compared
      with
      a gold price of $450 per ounce used in the previous estimate.





In
      September 2008, we initiated a 10 hole deep core drilling campaign at our El
      Chanate mine consisting of 2,500 meters which will target the southern extremity
      of the main pit. Once this data has been compiled and analyzed, it will be
      combined with results from a previous drilling campaign initiated in December
      2007 which consisted of a 26 reverse circulation holes amounting to 4,912
      meters. These drill holes were mainly positioned to test the outer limits of
      the
      currently known ore zones within the main pit. All data will be combined with
      the intention of increasing proven and probable reserves.





Gold
      production at El Chanate is currently at a level of approximately 5,000 ounces
      per month inclusive of gold equivalents.





For
      more
      information on the El Chanate Project, please see *“Item
      2. Property; El Chanate Properties – Sonora, Mexico.”*





**Competition**





The
      acquisition of gold properties and their exploration and development are subject
      to intense competition. Companies with greater financial resources, larger
      staffs and more equipment for exploration and development may be in a better
      position than us to compete for such mineral properties. Our limited financial
      resources in relation to companies with greater resources may hinder our ability
      to compete for and acquire additional mineral properties.


1


**Human
      Resources**





As
      of
      October 24, 2008, we had 143 full time and 16 temporary employees working at
      our
      El Chanate mine in Sonora, Mexico as well as eight full time employees in the
      US. We also utilize a mining contractor at the El Chanate mine which had 42
      personnel onsite.





**Cautionary
      Statement on Forward-Looking Statements**





Certain
      statements in this report constitute “forwarding-looking statements” within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities and Exchange Act of 1934. Certain, but not necessarily all, of such
      forward-looking statements can be identified by the use of forward-looking
      terminology such as “believes,” “expects,” “may,” “will,” “should,” or
“anticipates” or the negative thereof or other variations thereon or comparable
      terminology, or by discussions of strategy that involve risks and uncertainties.
      All statements other than statements of historical fact, included in this report
      regarding our financial position, business and plans or objectives for future
      operations are forward-looking statements. Without limiting the broader
      description of forward-looking statements above, we specifically note that
      statements regarding exploration and mine development, construction and
      expansion plans, costs, grade, production and recovery rates, permitting,
      financing needs, the availability of financing on acceptable terms or other
      sources of funding, if needed, and the timing of additional tests, feasibility
      studies and environmental permitting are all forward-looking in nature.





Such
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors, including but not limited to, the risk factors discussed below
      in *Item
      1A. “Risk Factors”* which
      may cause our actual results, performance or achievements to be materially
      different from any future results, performance or achievements expressed or
      implied by such forward-looking statements and other factors referenced in
      this
      report. We do not undertake and specifically decline any obligation to publicly
      release the results of any revisions which may be made to any forward-looking
      statement to reflect events or circumstances after the date of such statements
      or to reflect the occurrence of anticipated or unanticipated
      events.


2


**Item
      1A.** **Risk
      Factors**





**The
      risks described below should not be considered to be comprehensive and
      all-inclusive. Additional risks that we do not yet know of or that we currently
      think are immaterial may also impair our business operations. If any events
      occur that give rise to the following risks, our business, financial condition,
      cash flow or results of operations could be materially and adversely affected,
      and as a result, the trading price of our Common Stock could be materially
      and
      adversely impacted. These risk factors should be read in conjunction with other
      information set forth in this report, including our Consolidated Financial
      Statements and the related Notes.**





**Risks
      related to our business and operations**





***If
      we are unable to sustain sufficient operating revenues, we will not be able
      to
      generate profits and our business may fail.***





Until
      this past fiscal year, we had no producing properties and, historically, have
      operated at a loss. We only commenced gold producing activities and started
      to
      generate revenues in August 2007. Our ultimate success will depend on our
      ability to continue to generate profits from our properties. While we have
      commenced revenue producing mining operations, we cannot assure that revenues
      will continue to cover cash flow requirements.





***While
      we believe that we will continue to generate positive cash flow and profits
      from
      operations, if we encounter unexpected problems, we may need to raise additional
      capital. If additional capital is required and we are unable to obtain it from
      outside sources, we may be forced to reduce or curtail our operations or our
      anticipated exploration activities.***





Prior
      to
      the first fiscal quarter of 2008, we were not able to generate cash flow from
      operations. While we now are generating positive cash flow and profits, if
      we
      encounter unexpected problems and we are unable to continue to generate positive
      cash flow and profits, we may need to raise additional capital. We also may
      need
      to raise additional capital for property acquisition and new exploration. To
      the
      extent that we need to obtain additional capital, management intends to raise
      such funds through the sale of our securities and/or joint venturing with one
      or
      more strategic partners. We cannot assure that adequate additional funding,
      if
      needed, will be available. This is especially true given the current significant
      instability in the financial markets. If we need additional capital and we
      are
      unable to obtain it from outside sources, we may be forced to reduce or curtail
      our operations or our anticipated exploration activities.





***Our
      Credit Facility with Standard Bank plc imposes restrictive covenants on us.***





Our
      Credit Facility with Standard Bank requires us, among other obligations, to
      meet
      certain financial covenants including (i) a ratio of current assets to current
      liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly
      minimum tangible net worth at all times of at least U.S.$15,000,000, and (iii)
      a
      quarterly average minimum liquidity of U.S.$500,000. In addition, the Credit
      Facility restricts, among other things, our ability to incur additional debt,
      create liens on our property, dispose of any assets, merge with other companies,
      enter into hedge agreements, organize or invest in subsidiaries or make any
      investments above a certain dollar limit.  A failure to comply with the
      restrictions contained in the Credit Facility could lead to an event of default
      thereunder which could result in an acceleration of such
      indebtedness.


3


***Our
      mining contractor is using reconditioned equipment which could adversely affect
      our cost assumptions and our ability to economically and successfully mine
      the
      project.***





Sinergia,
      our mining contractor, is using equipment **** that
      is
      not new. Such equipment is subject to the risk of more frequent breakdowns
      and
      need for repair than new equipment. If the equipment that we or Sinergia uses
      breaks down and needs to be repaired or replaced, we will incur additional
      costs
      and operations may be delayed resulting in lower amounts of gold recovered.
      In
      such event, our capital and operating cost assumptions may be inaccurate and
      our
      ability to economically and successfully mine the project may be hampered,
      resulting in decreased revenues and, possibly, a loss from operations.





***The
      gold deposit we have identified at El Chanate is relatively low-grade. If our
      estimates and assumptions are inaccurate, our results of operation and financial
      condition could be materially adversely affected.***





The
      gold
      deposit we have identified at our El Chanate Project is relatively low-grade.
      If
      the estimates of ore grade or recovery rates turn out to be lower than the
      actual ore grade and recovery rates, if costs are higher than expected, or
      if we
      experience problems related to the mining, processing, or recovery of gold
      from
      ore at the El Chanate Project, our results of operation and financial condition
      could be materially adversely affected. Moreover, it is possible that actual
      costs and economic returns may differ materially from our best estimates. It
      is
      not unusual in the mining industry for new mining operations to experience
      unexpected problems during the initial production phase and to require more
      capital than anticipated. There can be no assurance that our operations at
      El
      Chanate will continue to be profitable.





***We
      have only one project. As a result, our chances of conducting viable mining
      operations are dependent upon the success of that
      project.***





Our
      only
      current properties are the El Chanate concessions. Accordingly, we are dependent
      upon the success of the El Chanate concessions.





***Gold
      prices can fluctuate on a material and frequent basis due to numerous factors
      beyond our control. Our ability to generate profits from operations could be
      materially and adversely affected by such fluctuating
      prices.***





The
      profitability of any gold mining operations in which we have an interest will
      be
      significantly affected by changes in the market price of gold. Gold prices
      fluctuate on a daily basis. During the fiscal year ended July 31, 2008, the
      spot
      price for gold on the London Exchange has fluctuated between $657.50 and
      $1,011.30 per ounce. Gold prices are affected by numerous factors beyond our
      control, including:





·
            the
                level of interest rates,


·
            the
                rate of inflation,


·
            central
                bank sales,


·
            world
                supply of gold and


·
            stability
                of exchange rates.





Each
      of
      these factors can cause significant fluctuations in gold prices. Such external
      factors are in turn influenced by changes in international investment patterns
      and monetary systems and political developments. The current significant
      instability in the financial markets heightens these fluctuations. The price
      of
      gold has historically fluctuated widely and, depending on the price of gold,
      revenues from mining operations may not be sufficient to offset the costs of
      such operations.


4


***We
      may not be successful in hedging against gold price and interest rate
      fluctuations and may incur mark-to-market losses and lose money through our
      hedging programs.***





We
      have
      entered into metals trading transactions to hedge against fluctuations in gold
      prices, using call option purchases and forward sales, and have entered into
      various interest rate swap agreements. The terms of our Credit Facility with
      Standard Bank require that we utilize various price hedging techniques to hedge
      a portion of the gold we plan to produce at the El Chanate Project and hedge
      at
      least 50% of our outstanding loan balance. There can be no assurance that we
      will be able to successfully hedge against gold price and interest rate
      fluctuations.




Further,
      there can be no assurance that the use of hedging techniques will always be
      to
      our benefit. Hedging instruments that protect against metals market price
      volatility may prevent us from realizing the full benefit from subsequent
      increases in market prices with respect to covered production, which would
      cause
      us to record a mark-to-market loss, decreasing our profits. Hedging contracts
      also are subject to the risk that the other party may be unable or unwilling
      to
      perform its obligations under these contracts. Any significant nonperformance
      could have a material adverse effect on our financial condition, results of
      operations and cash flows.





To
      date,
      rather than modifying the original Gold Price Protection agreement with Standard
      Bank to satisfy these forward sale obligations, we have opted for a net cash
      settlement between the call option purchase price of $535 and the forward sale
      price of $500, or $35.00 per oz. As of September 30, 2008, we have paid Standard
      Bank an aggregate of approximately $1,936,000 on the settlement of 55,325
      ounces. The remaining ounces to settle with regard to this agreement amounted
      to
      66,602 as of September 30, 2008. We believe we will be able to deliver the
      quantity of gold required by our forward sales on a going forward basis;
      however, we may continue to opt to net cash settle these forward sale
      obligations if it remains the most cost effective option for us. If we are
      unable for any reason to produce the quantity of gold required by our forward
      sales and generate sufficient cash flow to settle these forward sales in gold
      or
      cash, it could have a material adverse effect on our financial condition and
      cash flows.





***Our
      material property interests are in Mexico. Risks of doing business in a foreign
      country could adversely affect our results of operations and financial
      condition.***





We
      face
      risks normally associated with any conduct of business in a foreign country
      with
      respect to our El Chanate Project in Sonora, Mexico, including various levels
      of
      political and economic risk. The occurrence of one or more of these events
      could
      have a material adverse impact on our efforts or operations which, in turn,
      could have a material adverse impact on our cash flows, earnings, results of
      operations and financial condition. These risks include the
      following:





·
            labor
                disputes,


·
            invalidity
                of governmental orders,


·
            uncertain
                or unpredictable political, legal and economic
                environments,


·
            war
                and civil disturbances,


·
            changes
                in laws or policies,


·
            taxation,


·
            delays
                in obtaining or the inability to obtain necessary governmental
                permits,


·
            governmental
                seizure of land or mining claims,


·
            limitations
                on ownership,


·
            limitations
                on the repatriation of earnings,


·
            increased
                financial costs,


5


·
            import
                and export regulations, including restrictions on the export of gold,
                and


·
            foreign
                exchange controls.





These
      risks may limit or disrupt the project, restrict the movement of funds or impair
      contract rights or result in the taking of property by nationalization or
      expropriation without fair compensation.





***We
      sell gold in U.S. dollars; however, we incur a significant amount of our
      expenses in Mexican pesos. If applicable currency exchange rates fluctuate,
      our
      revenues and results of operations may be materially and adversely affected.***





We
      sell
      gold in U.S. dollars. We incur a significant amount of our expenses in Mexican
      pesos. As a result, our financial performance would be affected by fluctuations
      in the value of the Mexican peso to the U.S. dollar.





***Changes
      in regulatory policy could adversely affect our exploration and future
      production activities.***





Any
      changes in government policy may result in changes to laws
      affecting:





·
            ownership
                of assets,


·
            land
                tenure,


·
            mining
                policies,


·
            monetary
                policies,


·
            taxation,


·
            rates
                of exchange,


·
            environmental
                regulations,


·
            labor
                relations,


·
            repatriation
                of income and/or


·
            return
                of capital.





Any
      such
      changes may affect our ability to undertake exploration and development
      activities in respect of future properties in the manner currently contemplated,
      as well as our ability to continue to explore, develop and operate those
      properties in which we have an interest or in respect of which we have obtained
      exploration and development rights to date. The possibility, particularly in
      Mexico, that future governments may adopt substantially different policies,
      which might extend to expropriation of assets, cannot be ruled out.





***Compliance
      with environmental regulations could adversely affect our exploration and future
      production activities.***





With
      respect to environmental regulation, future environmental legislation could
      require:





·
            stricter
                standards and enforcement,


·
            increased
                fines and penalties for non-compliance,


·
            more
                stringent environmental assessments of proposed projects and


·
            a
                heightened degree of responsibility for companies and their officers,
                directors and employees.


6


There
      can
      be no assurance that future changes to environmental legislation and related
      regulations, if any, will not adversely affect our operations. We could be
      held
      liable for environmental hazards that exist on the properties in which we hold
      interests, whether caused by previous or existing owners or operators of the
      properties. Any such liability could adversely affect our business and financial
      condition.





***We
      have insurance against losses or liabilities that could arise from our
      operations. If we incur material losses or liabilities in excess of our
      insurance coverage, our financial position could be materially and adversely
      affected.***


Mining
      operations involve a number of risks and hazards, including:





·
            environmental
                hazards,


·
            industrial
                accidents,


·
            metallurgical
                and other processing,


·
            acts
                of God, and/or


·
            mechanical
                equipment and facility performance problems.





Such
      risks could result in:





·
            damage
                to, or destruction of, mineral properties or production facilities,


·
            personal
                injury or death,


·
            environmental
                damage,


·
            delays
                in mining,


·
            monetary
                losses and /or


·
            possible
                legal liability.





Industrial
      accidents could have a material adverse effect on our future business and
      operations. We currently maintain general liability, business interruption,
      auto
      and property insurance coverage. We cannot be certain that the insurance we
      have
      in place will cover all of the risks associated with mining or that we will
      be
      able to maintain insurance to cover these risks at economically feasible
      premiums. We also might become subject to liability for pollution or other
      hazards which we cannot insure against or which we may elect not to insure
      against because of premium costs or other reasons. Losses from such events
      may
      have a material adverse effect on our financial position.





***Calculation
      of reserves and metal recovery dedicated to future production is not exact,
      might not be accurate and might not accurately reflect the economic viability
      of
      our properties.***





Reserve
      estimates may not be accurate. There is a degree of uncertainty attributable
      to
      the calculation of reserves, resources and corresponding grades being dedicated
      to future production. Until reserves or resources are actually mined and
      processed, the quantity of reserves or resources and grades must be considered
      as estimates only. In addition, the quantity of reserves or resources may vary
      depending on metal prices. Any material change in the quantity of reserves,
      resource grade or stripping ratio may affect the economic viability of our
      properties. In addition, there can be no assurance that mineral recoveries
      in
      small scale laboratory tests will be duplicated in large tests under on-site
      conditions or during production.


7


***We
      are dependent on the efforts of certain key personnel and contractors to develop
      our El Chanate Project.  If we lose the services of these personnel and
      contractors and we are unable to replace them, our planned operations at our
      El
      Chanate Project may be disrupted and/or materially adversely
      affected.***





We
      are
      dependent on a relatively small number of key personnel, including but not
      limited to John Brownlie, Chief Operating Officer who, among other duties,
      oversees the El Chanate Project, the loss of any one of whom could have an
      adverse effect on us. We are also dependent upon Sinergia to provide mining
      services.  Sinergia commenced mining operations on March 25, 2007, and
      transitioned from the pre-production to production phase of the mining contract
      in July 2007.  Sinergia’s mining fleet is not new. If we lose the services
      of our key personnel, or if Sinergia is unable to effectively maintain its
      fleet, our planned operations at our El Chanate Project may be disrupted and/or
      materially adversely affected.





***There
      are uncertainties as to title matters in the mining industry. We believe that
      we
      have good title to our properties; however, any defects in such title that
      cause
      us to lose our rights in mineral properties could jeopardize our planned
      business operations.***





We
      have
      investigated our rights to explore, exploit and develop our concessions in
      manners consistent with industry practice and, to the best of our knowledge,
      those rights are in good standing. However, we cannot assure that the title
      to
      or our rights of ownership in the El Chanate concessions will not be challenged
      by third parties or governmental agencies. In addition, there can be no
      assurance that the concessions in which we have an interest are not subject
      to
      prior unregistered agreements, transfers or claims and title may be affected
      by
      undetected defects. Any such defects could have a material adverse effect on
      us.





***Our
      ability to maintain long-term profitability eventually will depend on our
      ability to find, explore and develop additional properties. Our ability to
      acquire such additional properties could be hindered by competition. If we
      are
      unable to acquire, develop and economically mine additional properties, we
      most
      likely will not be able to be profitable on a long-term
      basis.***





Gold
      properties are wasting assets. They eventually become depleted or uneconomical
      to continue mining. The acquisition of gold properties and their exploration
      and
      development are subject to intense competition. Companies with greater financial
      resources, larger staffs, more experience and more equipment for exploration
      and
      development may be in a better position than us to compete for such mineral
      properties. If we are unable to find, develop and economically mine new
      properties, we most likely will not be able to be profitable on a long-term
      basis.





***Our
      ability on a going forward basis to discover additional viable and economic
      mineral reserves is subject to numerous factors, most of which are beyond our
      control and are not predictable. If we are unable to discover such reserves,
      we
      most likely will not be able to be profitable on a long-term
      basis.***





Exploration
      for gold is speculative in nature, involves many risks and is frequently
      unsuccessful. Few properties that are explored are ultimately developed into
      commercially producing mines. As noted above, our long-term profitability will
      be, in part, directly related to the cost and success of exploration programs.
      Any gold exploration program entails risks relating to





·
            the
                location of economic ore bodies,


·
            development
                of appropriate metallurgical processes,


·
            receipt
                of necessary governmental approvals and


8


·
            construction
                of mining and processing facilities at any site chosen for mining.





The
      commercial viability of a mineral deposit is dependent on a number of factors
      including:





·
            the
                price of gold,


·
            the
                particular attributes of the deposit, such as its


o
            size,


o
            grade
                and


o
            proximity
                to infrastructure,


·
            financing
                costs,


·
            taxation,


·
            royalties,


·
            land
                tenure,


·
            land
                use,


·
            water
                use,


·
            power
                use,


·
            importing
                and exporting gold and


·
            environmental
                protection.





The
      effect of these factors cannot be accurately predicted.





**Risks
      related to ownership of our stock**





***The
      market price of our stock may be adversely affected by market volatility due
      to
      the current significant instability in the financial
      markets.***





As
      a
      result of the current substantial instability in the financial markets, our
      stock price has recently fluctuated significantly. We cannot predict if or
      when
      current adverse economic conditions will be


resolved
      and what the affect this instability will continue to have on the price of
      our
      stock.





***We
      do not intend to pay cash dividends in the near future.***





Our
      Board
      of Directors determine whether to pay cash dividends on our issued and
      outstanding shares. The declaration of dividends would depend upon our future
      earnings, our capital requirements, our financial condition and other relevant
      factors. Our board does not intend to declare any dividends on our shares for
      the foreseeable future. We anticipate that we will retain any earnings to
      finance the growth of our business and for general corporate purposes.





***Provisions
      of our Certificate of Incorporation, By-laws and Delaware law could defer a
      change of our management which could discourage or delay offers to acquire
      us.***





Provisions
      of our Certificate of Incorporation, By-laws and Delaware law may make it more
      difficult for someone to acquire control of us or for our stockholders to remove
      existing management, and might discourage a third party from offering to acquire
      us, even if a change in control or in management would be beneficial to our
      stockholders. For example, our Certificate of Incorporation allows us to issue
      different series of shares of common stock without any vote or further action
      by
      our stockholders and our Board of Directors has the authority to fix and
      determine the relative rights and preferences of such series of common stock.
      As
      a result, our Board of Directors could authorize the issuance of a series of
      common stock that would grant to holders the preferred right to our assets
      upon
      liquidation, the right to receive dividend payments before dividends are
      distributed to the holders of other common stock and the right to the redemption
      of the shares, together with a premium, prior to the redemption of other series
      of our common stock.


9


**Item
      1B.** **Unresolved
      Staff Comments**





None.





**Item
      2.** **Property**





**El
      Chanate Properties – Sonora, Mexico**





Through
      our wholly-owned subsidiaries, Oro de Altar S. de R. L. de C.V. (“Oro”) and
      Minera Santa Rita S. de R.L. de C.V. (“MSR”), we own 100% of the following 16
      mining concessions, all of which are located in the Municipality of Altar,
      State
      of Sonora United States of Mexico.





The
      16
      mining concessions are as follows:





**Concession Name**
            
            **Title No.**
            
            **Hectares**1
            
            
            San Jose
            
            
            200718
            
            
            96.00002
            
            
            Las
                Dos Virgen
            
            
            214874
            
            
            132.23503
            
            
            Rono
                I
            
            
            206408
            
            
            82.19024
            
            
            Rono
                3
            
            
            214224
            
            
            197.21805
            
            
            La
                Cuchilla
            
            
            211987
            
            
            143.34816
            
            
            Elsa
            
            
            212004
            
            
            2,035.39977
            
            
            Elisa
            
            
            214223
            
            
            78.47178
            
            
            Ena
            
            
            217495
            
            
            190.00009
            
            
            Eva
            
            
            212395
            
            
            416.896310
            
            
            Mirsa
            
            
            212082
            
            
            20.551811
            
            
            Olga
            
            
            212081
            
            
            60.589012
            
            
            Edna
            
            
            212355
            
            
            24.043113
            
            
            La
                Tira
            
            
            219624
            
            
            1.797514
            
            
            La
                Tira 1
            
            
            219623
            
            
            18.608715
            
            
            Los
                Tres
            
            
            223634
            
            
            8.00016
            
            
            El
                Charro
            
            
            206404
            
            
            40.0000**Total**
            
            
            
            
            
            3,543.3491





At
      the El
      Chanate Project we are mining on two concessions, San Jose and Las Dos Virgens.
      We are utilizing four other concessions for processing mined ores. In the
      future, we plan to explore some or all of these concessions to determine whether
      or not further activity is warranted.


10







Until
      August 2006, we were following an August 2003 feasibility study (the “2003
      Study”) prepared by M3 Engineering of Tucson, Arizona (“M3”) as updated by M3 in
      October 2005 (The “2005 Study”). The 2005 Study used a base gold price of $375
      per ounce. In view of a significant rise in the gold price, in June 2006, we
      commissioned SRK Consulting, Denver, Colorado, to prepare an updated Canadian
      Securities Administration National Instrument 43-101 compliant technical report
      on our El Chanate Project. SRK completed this technical report in August 2006
      (the “2006 Update”).





In
      May
      2007, we completed an expanded 72-hole reverse circulation drilling campaign
      to
      identify additional proven and probable gold reserves at the El Chanate Project.
      The 72 holes totaled approximately 8,300 meters, and were positioned to fill
      in
      gaps in the ore body and test the outer limits of the currently known ore zones.
      We turned the assay data over to Independent Mining Consultants, Inc. (“IMC”) of
      Tucson, AZ to update our ore reserve and our mine plan. On August 30, 2007,
      IMC
      delivered to us an updated resource block model and an updated mine plan and
      mine production schedule (the “2007 Report”).





According
      to the 2007 Report, our proven and probable reserve tonnage increased by
      approximately 98 percent from 19.9 million to 39.5 million metric tonnes with
      a
      gold grade of 0.66 grams per tonne (43.5 million US short tons at 0.019 ounces
      per ton). The open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one
      tonne of ore). The updated pit design for the revised plan in the 2007 Report
      is
      based on a plant recovery of gold that varies by rock types, but is expected
      to
      average 66.8%. A gold price of US$550 (three year average as of July 31, 2007
      as
      determined by IMC) per ounce was used to re-estimate the reserves compared
      with
      a gold price of $450 per ounce used in the previous estimate.


11


In
      September 2008, we initiated a 10 hole deep core drilling campaign at our El
      Chanate mine consisting of 2,500 meters which will target the southern extremity
      of the main pit. Once this data has been compiled and analyzed, it will be
      combined with results from a previous drilling campaign initiated in December
      2007 which consisted of a 26 reverse circulation holes amounting to 4,912
      meters. These drill holes were mainly positioned to test the outer limits of
      the
      currently known ore zones within the main pit. All data will be combined with
      the intention of increasing proven and probable reserves.





During
      fiscal 2008, we identified certain restrictions related to our ADR plant
      capacity which limited the amount of solution that can be processed. We have
      addressed these issues by doubling the installed pumping capacity to increase
      solution flow to the leach pad and added additional carbon capacity to the
      system. We also purchased and installed an additional set of carbon columns
      and
      a strip vessel to process an additional two tonnes of carbon per strip. The
      installation and commissioning of these ADR plant upgrades was completed at
      the
      end of October 2008.





Gold
      production at El Chanate is currently at a level of approximately 5,000 ounces
      per month inclusive of gold equivalents. We have implemented steps necessary
      to
      effectively increase production rates to approximately 70,000 ounces per year
      in
      2009. As of August 31, 2008, we have expended approximately $3,500,000 on the
      leach pad expansion and ADR plant improvement. Management has been and
      anticipates that it will continue to fund these expansion costs with its cash
      on
      hand as well as through revenues from gold sales.





The
      following Summary is extracted from the 2007 Report. Please note that the
      reserves as stated are an estimate of what can be economically and legally
      recovered from the mine and, as such, incorporate losses for dilution and mining
      recovery. **** The
      832,280 ounces of contained gold represents ounces of gold contained in ore
      in
      the ground, and therefore does not reflect losses in the recovery process.
      Total
      gold produced is estimated to be 555,960 ounces, or approximately 66.8% of
      the
      contained gold. The gold recovery rate is expected to average approximately
      66.8% for the entire ore body. Individual portions of the ore body may
      experience varying recovery rates ranging from about 73% to 48%. Oxidized and
      sandstone ore types may have recoveries of about 73%; fault zone ore type
      recoveries may be about 64%; siltstone ore types recoveries may be about 48%
      and
      latite intrusive ore type recoveries may be about 50%.


12


El
      Chanate Project





**Production
      Summary**





Metric
            
            U.S.**Materials**
              **Reserves**
              Proven
              Probable
              Total
                Reserves
              **Waste**
              Total
              
              Contained
                Gold
              
              **Production**
              Ore
                Crushed**
              
              
              Operating
                Days/Year
              Gold
                Plant Average Recovery
              Average
                Annual Production**
              Total
                Gold Produced
            
            26.7
                Million Tonnes @ 0.68 g/t*
              12.8
                Million Tonnes@0.61g/t*
              39.5
                Million Tonnes @ 0.66 g/t*
              24.1
                Million Tonnes
              63.6
                 Million Tonnes
              
              25.89
                Million grams
              
              
              2.6
                Million Tonnes /Year
              7,500
                Mt/d
              
              365
                Days per year
              66.8
                %
              1.35
                Million grams
              17.29
                Million grams
            
            29.4
                Million Tons @ 0.0198 opt*
              14.1
                Million Tons@0.0179opt*
              43.5
                Million Tons @ 0.0192 opt*
              26.6
                Million Tons
              70.1
                Million tons
              
              832,280
                Oz
              
              
              2.87
                Million Tons/Year
              8,267
                t/d
              
              365
                Days per year
              66.8
                %
              43,414
                Oz
              555,960
                Oz





*
“g/t”
      means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means metric
      tonnes per day and “t/d” means tons per day. The reserve estimates are based on
      a recovered gold cutoff grade of 0.17 to 0.21 grams per metric tonne, depending
      on the operating year, and as described below.





**
      Based
      on mining rate of 7,500 metric tonnes per day of ore. We are currently in excess
      of 10,000 metric tonnes per day.




In
      the
      mineral resource block model developed, with blocks 6m (meters) x 6m x 6m high,
      Measured and Indicated resources (corresponding to Proven and Probable reserves
      respectively when within the pit design) were classified in accordance with
      the
      following scheme:




·
            Blocks
                with 2 or more drill holes within a search radius of 80m x 70m x
                40m and
                with a relative kriging (a geostatistical calculation technique)
                standard
                deviation less than or equal to 0.45 were classified as Measured
                (corresponding to Proven);




·
            Blocks
                with 1 hole within the search radius of 80m x 70m x 40m and with
                a
                relative kriging standard deviation of 0.60 or less, blocks with
                2 holes
                and a kriging standard deviation of 0.70 or less, blocks with 3 holes
                and
                a kriging standard deviation of 0.80 or less, blocks with 4 holes
                and a
                relative kriging standard deviation of 0.90 or less and all blocks
                with 5
                or more holes within the search radius were classified as Indicated
                (corresponding to Probable), unless they met the above criterion
                for
                Proven;


13


·
            Blocks
                with a grade estimate that did not meet the above criteria were classified
                as Inferred (and which was classed as waste material in the mining
                reserves estimate);




·
            Blocks
                outside the above search radii or outside suitable geological zones
                were
                not assigned a gold grade or a resource
                classification.





The
      proven and probable reserve estimates are based on a recovered gold cutoff
      grade
      of 0.17 to 0.21 grams/tonne, depending on the operating year. The variation
      is
      due to balancing the mine and plant production capacities on a year by year
      basis for the plan. (A recovered gold cutoff grade was used for reserves
      calculation as the head gold grade cutoff varies with the different ore types
      due to their variable gold recoveries.) The internal (in-pit) and break even
      cutoff grade calculations are as follows:





**Cutoff
                Grade Calculation**
              **Basic
                Parameters**
              ****Gold
                Price
              Shipping
                and Refining
              Gold
                Recovery
              Royalty
              
              **Operating
                Costs per Tonne of Ore**
              Mining
                *
              Processing/Leach
                Pad
              G&A
              Total
              
              **Internal
                Cutoff Grade**
              Head
                Grade Cutoff (66.8% recov.)
              Recovered
                Gold Grade Cutoff
            **Internal
                Cutoff Grade**
              
              US$550/oz
              US$
                4.14/oz
              66.8%
              4%
                of NSR
              
              $
                per Tonne of Ore
              0.070
              1.980
              0.800
              2.850
              
              Grams
                per Tonne
              0.25
              0.17
            **Break
                Even Cutoff Grade**
              
              US$550/oz
              US$
                4.14/oz
              66.8%
              4%
                of NSR
              
              $
                per Tonne of Ore
              1.360
              1.980
              0.800
              4.140
              
              Grams
                per Tonne
              0.37
              0.25





*
      The
      calculation of an internal cutoff grade does not include the basic mining costs
      (which are considered to be sunk costs for material within the designed pit).
      The $0.07 per tonne cost included is the incremental (added) cost of hauling
      ore
      over hauling waste, and which is included in the calculation.





Surface
      Property Ownership





Anglo
      Gold purchased surface property ownership, consisting of 466 Hectares in Altar,
      Sonora, on January 27, 1998. The ownership was conveyed to our subsidiary,
      Oro
      de Altar S.A. de C.V., in 2002. MSR, one of our wholly-owned Mexican affiliates,
      has a lease on the property for the purpose of mining the Chanate gold deposit.
      The purchase transaction was recorded as public deed 19,591 granted by Mr.
      Jose
      Maria Morera Gonzalez, Notary Public 102 of the Federal District, registered
      at
      the Public Registry of Property of Caborca, Sonora, under number 36026, book
      one, volume 169 of the real estate registry section on May 7,
      1998.


14


General
      Information and Location





The
      El
      Chanate Project is located in the State of Sonora, Mexico, 37 kilometers
      northeast of the town of Caborca. It is accessible by paved and all weather
      dirt
      roads typically traveled by pickup trucks and similar vehicles. Driving time
      from Caborca is approximately 40 minutes. Access from Caborca to the village
      of
      16 de September is over well maintained National highways. Beyond the 16 de
      September village, routes to the property are currently over well traveled
      gravel and sandy desert roads suitable for all **** types
      of **** vehicles.
      We acquired rights for service road access from the village of 16 de September,
      and constructed this road.





The
      project is situated on the Sonora desert in a hot and windy climate, generally
      devoid of vegetation with the exception of cactus. The terrain is generally
      flat
      with immense, shallow basins, scattered rock outcropping and low rocky hills
      and
      ridges. The desert floor is covered by shallow, fine sediment, gravel and
      caliche. The main body of the known surface gold covers an irregularly shaped
      area of approximately 3,170 feet long by 1,590 feet wide. Several satellite
      mineral anomalies exist on surfaces which have not been thoroughly explored.
      Assays on chip samples taken from trenches at these locations by us **** indicate
      the presence of gold mineralization.





In
      2005,
      we acquired 15 year rights of way for the current access road, and we acquired
      the right to purchase 81 hectares of land near the main highway. We have use
      of
      the land; however, our actual purchase of the land is conditioned upon the
      Ejido
      (local cooperative) privatizing the land, before the acquisition is finalized.
      We subsequently purchased an extension of our rights-of-way from 15 to 30 years.
      In addition to this road, we acquired a water concession, and our water well
      is
      located within a large regional aquifer. The 2005 feasibility study indicated
      our average life of mine water requirements, for ore processing only, will
      be
      about 94.6 million gallons per year (11.4 liters per second). The amount of
      water we were permitted to pump for our operations was approximately 71.3
      million gallons per year (8.6 liters per second). In September 2007, and in
      conjunction with the results of the 2007 Report, we acquired additional water
      rights which permits us to consume up to 109.1 million gallons per year. Based
      on the anticipated water consumption for the life of mine, we believe that
      we
      have an allocation to meet our requirements.





In
      December 2005, MSR entered into a Mining Contract with a Mexican mining
      contractor, Sinergia Obras Civiles y Mineras, S.A. de C.V. (“Contractor”). The
      Mining Contract, as amended, became effective November 1, 2006 and work
      commenced on or about March 25, 2007 (the “Commencement Date”). Pursuant to an
      amendment to the Mining Contract, the mining rates set forth in that contract
      are subject to adjustment for the rate of inflation between September 23,
      2005 and the Commencement Date. We are currently in negotiations with the
      Contractor on an adjustment to these rates for the aforementioned period.
      Pursuant to the Mining Contract, the Contractor, using its own equipment, is
      supposed to perform all of the mining work (other than crushing) at the El
      Chanate Project for the life of the mine. MSR delivered to the Contractor a
      mobilization payment of $70,000 and the advance payment of $520,000. The advance
      payments are recoverable by MSR out of 100% of subsequent payments due to the
      Contractor under the Mining Contract. Pursuant to the Mining Contract, upon
      termination, the Contractor would be obligated to repay any portion of the
      advance payment that had not yet been recouped. The Contractor’s mining rates
      are subject to escalation on an annual basis. This escalation is tied to the
      percentage escalation in the Contractor’s costs for various parts for its
      equipment, interest rates and labor. One of the principals of the Contractor
      (“FG’s Successor”) is one of the former principals of Grupo Minero FG S.A. de
      C.V. (“FG”). FG was our former joint venture partner. In March 2007, we made a
      further advance to the Contractor of $319,000 in consideration of FG’s
      successors transfer to us of his remaining interest in MSR. As of July 31,
      2008,
      the entire advance has been recovered.





The
      general El Chanate mine area has been mined for gold since the early
      19 th century.
      A number of old underground workings exist characterized by narrow shafts,
      to a
      depth of several tens of feet and connecting drifts and cross cuts. No
      information exists regarding the amount of gold taken out; however, indications
      are that mining was conducted on a small scale.


15


Geology





The
      project area is underlain by sedimentary rocks of the Late Jurassic – Early
      Cretaceous Bisbee Group, and the Late Cretaceous Chanate Group, which locally
      are overlain by andesites of the Cretaceous El Charro volcanic complex. The
      sedimentary strata are locally intruded by andesitic sills and dikes, a
      microporphyritic latite and by a diorite stock. The sedimentary strata are
      comprised of mudstone, siltstone, sandstone, conglomerate, shale and limestone.
      Within the drilled resource area, a predecessor exploration company
      differentiated two units on the basis of their position relative to the Chanate
      fault. The upper member is an undifferentiated sequence of sandstone,
      conglomerate and lesser mudstone that lies above the Chanate fault and it is
      assigned to the Escalante Formation of the Middle Cretaceous Chanate Group.
      The
      lower member is comprised of mudstone with mixed in sandstone lenses and thin
      limestone interbreds; it lies below the Chanate fault and is assigned to the
      Arroyo Sasabe Formation of the Lower Cretaceous Bisbee Group. The Arroyo Sasabe
      formation overlies the Morita Formation of the Bisbee Group. Both the Escalante
      and Arroyo Sasabe formations are significantly mineralized proximal to the
      Chanate fault, while the Morita Formation is barren.





The
      main
      structural feature of the project area is the Chanate fault, a 7 km long
      (minimum) northwest-striking, variably southwest-dipping structure that has
      been
      interpreted to be a thrust fault. The Chanate fault is overturned
      (north-dipping) at surface, and is marked by brittle deformation and shearing
      which has created a pronounced fracture foliation and fissility in the host
      rocks. In drill holes the fault is often marked the presence of an andesite
      dike. Reports prepared by a predecessor exploration company describe the fault
      as consisting of a series of thrust ramps and flats; however, geologic cross
      sections which we have reviewed but did not prepare may negate this
      interpretation.





Alteration/Mineralization





A
      predecessor exploration company has defined a 600 meter long, 300 meter wide,
      120 meter thick zone of alteration that is centered about the Chanate fault.
      The
      strata within this zone have been silicified and pyritized to varying degrees.
      In surface outcrop the mineralized zone is distinguished by its bleached
      appearance relative to unmineralized rock. The mineralized zone contains only
      single digit ppm (parts per million) levels of gold. Dense swarms of veinlets
      form thick, mineralized lenses, within a larger area of sub-economic but
      anomalous gold concentrations. Drill hole data indicates that the mineralized
      lenses are sub-horizontal to gently southwest-dipping and are grossly parallel
      to the Chanate fault. The fault zone itself is also weakly mineralized, although
      strata in the near hanging wall and footwall are appreciably mineralized.





Our
      Acquisition and Ownership of the El Chanate Project





In
      June
      2001, we purchased 100% of the issued and outstanding stock of Minera Chanate,
      S.A. de C.V. from AngloGold North America Inc. and AngloGold (Jerritt Canyon)
      Corp. Minera Chanate’s assets at the time of the closing of the purchase
      consisted of 106 exploitation and exploration concessions in the States of
      Sonora, Chihuahua and Guerrero, Mexico. By June 2002, after property reviews
      and
      to minimize tax payments, the 106 had been reduced to 12 concessions. To cover
      certain non-critical gaps between concessions, four new concessions were
      acquired, and the number of concessions is now 16. These concessions are
      contiguous, totaling approximately 3,543 hectares (8,756 acres or 13.7 square
      miles). Although there are 16 concessions, we are only mining two of these
      concessions at the present time. We also own outright 466 hectares (1,151 acres
      or 1.8 square miles) of surface rights at El Chanate and no third party
      ownership or leases exist on this fee land or the El Chanate concessions. In
      the
      future, assuming adequate funding is available, we plan on conducting
      exploration activities on some of the other concessions.


16


Pursuant
      to the terms of the agreement with Anglo Gold, in December 2001, we made a
      $50,000 payment to AngloGold. AngloGold will be entitled to receive the
      remainder of the purchase price by way of an ongoing percentage of net smelter
      returns of between 2% and 4% plus a 10% net profits interest (until the total
      net profits interest payment received by AngloGold equals $1,000,000).
      AngloGold's right to a payment of a percentage of net smelter returns and the
      net profits interest will terminate at such point as they aggregate $18,018,355.
      In accordance with the agreement, the foregoing payments are not to be construed
      as royalty payments. Should the Mexican government or other jurisdiction
      determine that such payments are royalties, we could be subjected to and would
      be responsible for any withholding taxes assessed on such payments. During
      the  first
      part of 2008, Royal Gold, Inc. acquired from Anglo Gold the right to receive
      both the net smelter returns of between 2% and 4% plus and the 10% net profits
      interest which terminates at such point as they aggregate $18,018,355. As of
      July 31, 2008, we have incurred approximately $1,272,000 and $728,000 in expense
      with regard to both the net smelter return and net profits interest,
      respectively.





Under
      the
      terms of the agreement, we had granted AngloGold the right to designate one
      of
      its wholly-owned Mexican subsidiaries to receive a one-time option to purchase
      51% of Minera Chanate (or such entity that owns the El Chanate concessions
      at
      the time of option exercise). That option was exercisable over a 180 day period
      commencing at such time as we notified AngloGold that we had made a good faith
      determination that we had gold-bearing ore deposits on any one of the identified
      groups of El Chanate concessions, when aggregated with any ore that we have
      mined, produced and sold from such concessions, of in excess of 2,000,000 troy
      ounces of contained gold. The exercise price would equal twice our project
      costs
      on the properties during the period commencing on December 15, 2000 and ending
      on the date of such notice. In January 2008, we made a good faith determination
      and notified AngloGold that the drill indicated resources at the El Chanate
      gold
      mine exceeded two million ounces of contained gold. The term "drill indicated
      resources" is defined in the agreement. A drill indicated resource number does
      not rise to the level of, and should not be considered proven and probable
      reserves as those terms are defined under guidelines of the Securities Exchange
      Commission (“SEC”). On July 1, 2008, AngloGold notified us that it would not be
      exercising its back-in right.





**Saric
      Properties – Sonora, Mexico**





We
      recently leased 12 mining concessions totaling 1,790 hectares located northwest
      of Saric, Sonora. In addition, we filed and now own a claim for approximately
      2,200 additional hectares adjacent to this property. These concessions and
      this
      claim are about a sixty mile drive northeast of the El Chanate project.
      Mineralization is evident throughout and is hosted by shear zones and quartz
      veins in granite intrusive. A short drill program, along with geochemical work,
      is currently underway.





We
      continue to actively investigate other exploration projects in northern Mexico.


17


**Item
      3.** **Legal
      Proceedings**





We
      are
      not presently a party to any material litigation.





**Item
      4.** **Submission
      of Matters to a Vote of Security Holders** ****





No
      matter
      was submitted to a vote of our stockholders during the fiscal quarter ended
      July
      31, 2008.





**PART
      II**





**Item
              5.**
            **Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities****.**





(a)
      Marketing Information -- The principal U.S. market in which our common shares
      (all of which are of one class, $.0001 par value Common Stock) are traded or
      will trade is in the over-the-counter market (Bulletin Board Symbol: "CGLD").
      Our stock is not traded or quoted on any Automated Quotation
      System.





The
      following table sets forth the range of high and low closing bid quotes of
      our
      Common Stock per quarter for the past two fiscal years as reported by the OTC
      Bulletin Board (which reflect inter-dealer prices without retail mark-up,
      mark-down or commission and may not necessary represent actual transactions).





MARKET
      PRICE OF COMMON STOCK





Quarter
                Ending
            
            High
                and LowJuly
                31, 2008
            
            
            0.70
            
            
            0.60April
                30, 2008
            
            
            0.78
            
            
            0.62January
                31, 2008
            
            
            0.81
            
            
            0.60October
                31, 2007
            
            
            0.63
            
            
            0.38July
                31, 2007
            
            
            0.47
            
            
            0.38April
                30, 2007
            
            
            0.47
            
            
            0.37January
                31, 2007
            
            
            0.41
            
            
            0.31October
                31, 2006
            
            
            0.33
            
            
            0.28





Our
      Common Stock trades on the Toronto Stock Exchange under the symbol "CGC." The
      high and low closing prices for our Common stock for the periods indicated
      below
      are as follows:


18





Period
                Ending
            
            High
                and LowUS$/CDN$
            
            US$/CDN$Quarter
                ended July 31, 2008
            
            
            0.70/0.71
            
            
            0.61/0.60Quarter
                ended April 30, 2008
            
            
            0.83/0.83
            
            
            0.62/0.62Quarter
                ended January 31, 2008
            
            
            077/0.76
            
            
            0.58/0.57Quarter
                ended October 31, 2007
            
            
            0.60/0.61
            
            
            0.39/0.40Quarter
                ended July 31, 2007
            
            
            0.50/0.54
            
            
            0.35/0.37Quarter
                ended April 30, 2007
            
            
            0.52/0.60
            
            
            0.36/0.42Quarter
                ended January 31, 2007
            
            
            0.42/0.49
            
            
            0.27/0.31Quarter
                ended October 31, 2006
            
            
            0.36/0.40
            
            
            0.28/0.32





(b)
      Holders -- The approximate number of record holders of our Common Stock, as
      of
      October 24, 2008 amounts to 2,236 inclusive of those brokerage firms and/or
      clearing houses holding our common shares for their clientele (with each such
      brokerage house and/or clearing house being considered as one holder). The
      aggregate number of shares of Common Stock outstanding is 192,974,824 as of
      October 24, 2008 **.**





(c)
      Dividends – We have not paid or declared any cash dividends upon our Common
      Stock since inception and, by reason of our present financial status and our
      contemplated financial requirements, do not contemplate or anticipate paying
      any
      cash dividends upon our Common Stock in the foreseeable future.





On
      July
      17, 2008, at the recommendation of the Compensation Committee of the Board
      of
      Directors, our executive officers and directors were granted 515,000 shares
      under our 2006 Equity Incentive Plan. The restricted shares granted vested
      immediately. The fair value of the stock was $0.70 on the date of grant
      resulting in our recording approximately $361,000 in equity based compensation
      expense within general and administrative expense.





All
      of
      the foregoing issuances were exempt from registration pursuant to the provisions
      of Section 4(2) of the Securities Act of 1933.





We
      did
      not repurchase any of our securities during the fiscal year ended July 31,
      2008.





The
      following table gives information about our Common Stock that may be issued
      upon
      the exercise of options, warrants and rights under all of our equity
      compensation plans as of July 31, 2008.





Number of Securities to
              be issued upon exercise
              of outstanding options,
              warrants and rights*
            
            Weighted-average
              Exercise price of
              Outstanding options,
              warrants and rights
            
            Number of securities
              Remaining available for
              future issuance under
              equity compensation plans
              (excluding securities
              reflected in column (a))Plan Category(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders:
            
            
            4,665,000
            
            $
            0.56
            
            
            3,225,000Equity
                compensation plans not approved by security holders:
            
            
            900,000
            
            $
            0.58
            
            
            N/ATotal
            
            
            5,565,000
            
            $
            0.58
            
            
            3,225,000


19





*Does
      not
      include the issuance of 2,110,000 shares of restricted stock during the fiscal
      year ended July 31, 2008





**Performance
      Graph**





**Total
      Return To Shareholders**


(Includes
      reinvestment of dividends)





**QUARTERLY
                RETURN**
              **PERCENTAGE****Quarter
                Ending****Company
                / Index**
            
            **10/31/07**
            
            **1/31/08**
            
            **4/30/08**
            
            **7/31/08**Capital
                Gold Corporation
            
            
            36.07
            
            
            10.48
            
            
            -6.61
            
            
            -0.77S&P
                SmallCap 600 Index
            
            
            5.12
            
            
            -12.65
            
            
            1.20
            
            
            -1.48Peer
                Group
            
            
            9.32
            
            
            -20.42
            
            
            -4.41
            
            
            17.42





**INDEXED
                RETURNS****Base**
            
            
            
            **Quarter
                Ending****Period****Company
                / Index**
            
            **8/1/07**
            
            **10/31/07**
            
            **1/31/08**
            
            **4/30/08**
            
            **7/31/08**Capital
                Gold Corporation
            
            
            100
            
            
            136.07
            
            
            150.32
            
            
            140.39
            
            
            139.31S&P
                SmallCap 600 Index
            
            
            100
            
            
            105.12
            
            
            91.82
            
            
            92.92
            
            
            91.55Peer
                Group
            
            
            100
            
            
            109.32
            
            
            87.00
            
            
            83.16
            
            
            97.64





**Peer
                Group Companies:**ALAMOS
                GOLD INCGAMMON
                GOLD INCWESTERN
                GOLDFIELDS INC


20











**ITEM
      6.** **Selected
      Financial Data.**





The
      selected consolidated financial data set forth below should be read in
      conjunction with our consolidated financial statements, and the related notes
      thereto, and “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations,” included in this Annual Report. The statement of
      operations and balance sheet data presented below for, and as of the end of,
      each of the years in the five year period ended July 31, 2008 are derived from
      our audited consolidated financial statements. Historical results are not
      necessarily indicative of the results to be expected in the future. The Selected
      Financial Data is in thousands except for share and per share data.





Fiscal Year Ended July, 312008
            
            2007
            
            2006
            
            2005
            
            2004Statement
                of Operations data:Revenues
            
            $
            33,104
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Net
                Income (loss)
            
            $
            6,364
            
            $
            (7,472
            )
            $
            (4,805
            )
            $
            (2,006
            )
            $
            (2,939
            )Income
                (loss) per share – Basic
            
            $
            0.04
            
            $
            (0.05
            )
            $
            (0.04
            )
            $
            (0.03
            )
            $
            (0.06
            )Balance
                Sheet data:Total
                Assets
            
            $
            48,879
            
            $
            27,551
            
            $
            9,546
            
            $
            5,552
            
            $
            486Long-term
                Debt
            
            $
            8,375
            
            $
            12,500
            
            $
            -
            
            $
            -
            
            $
            -Reclamation
                and Remediation Liability
            
            $
            1,666
            
            $
            1,249
            
            $
            -
            
            $
            -
            
            $
            -


21





**Item
      7.** **Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations** **.**





The
      following discussion relates to the three fiscal years ended July 31, 2008,
      2007
      and 2006. As disclosed in greater detail elsewhere in this report, we commenced
      mining operations and began to receive operating revenues in August 2007,
      shortly after the end of the fiscal year ended July 31, 2007. (000’s, except
      where otherwise specifically noted).





***Overview***





You
      should read the following discussion and analysis of our financial condition
      and
      results of operations in conjunction with our financial statements and related
      notes included elsewhere in this report.





Our
      financial position was as follows:





For the year
            
            For the yearended
            
            endedJuly 31,
            
            July 31,2008
            
            2007Total
                debt
            
            $
            12,500
            
            $
            12,500Total
                stockholders’ equity
            
            $
            28,197
            
            $
            11,986Cash
                and cash equivalents
            
            $
            10,992
            
            $
            2,225Working
                capital
            
            $
            15,825
            
            $
            6,343




During
      our fiscal year ended July 31, 2008 our debt and liquidity positions were
      affected by the following:




·
            Net
                cash provided from continuing operations of
                $6,318;




·
            Capital
                expenditures of $5,507;




·
            Proceeds
                from the issuance of common stock upon the exercising of warrants
                of
                $7,474;




***Looking
      Forward***




Certain
      key factors will affect our future financial and operating results. These
      include, but are not limited to, the following (000’s except for ounces and cash
      cost data):




·
            Fluctuations
                in gold prices




·
            We
                expect minimum fiscal 2009 gold sales of approximately
                55,000 ounces;




·
            Cash
                costs per ounce sold, excluding royalties, for fiscal 2009 are expected
                to
                be approximately $250 to $275 per ounce as the impact of industry-wide
                cost pressures are expected to be slightly
                higher;




·
            We
                anticipate capital expenditures of approximately $5,500 to $6,500
                in
                fiscal 2009 with nearly all being allocated to our El Chanate mine
                in
                Sonora, Mexico;


22




·
            Our
                fiscal year 2009 expectations, particularly with respect to sales
                volumes
                and cash costs per ounce sold, may differ significantly from actual
                quarter and full fiscal year results due to variations in: ore grades
                and
                hardness, metal recoveries, waste removed, commodity input prices,
                foreign
                currencies and gold sale prices.





***Result
      of Operations***




Fiscal
      year ended July 31, 2008 compared to fiscal year ended July 31,
      2007





Net
      income for the year ended July 31, 2008 was approximately $6,364 compared to
      a
      net loss of approximately $7,472 for the year ended July 31, 2007. The principal
      reason for this transition was our realizing revenue from operations during
      the
      year ended July 31, 2008. Our first gold sale occurred in August 2007. Net
      income per common share was $0.04 for the year ended July 31, 2008, on a basic
      basis and $0.03 on a diluted basis. The net loss per share for the same period
      in 2007 was $0.05 on a basic basis. Basic
      and
      diluted net loss per share is computed using the weighted average number of
      shares of common stock outstanding during the period. Equivalent common shares,
      consisting of stock options and warrants were excluded from the calculation
      of
      diluted net loss per share for the fiscal year ended July 31, 2007 since their
      effect was anti-dilutive.





Revenues
      & Costs Applicable to Sales





Gold
      revenue for the year ended July 31, 2008 totaled approximately $33,104. We
      sold
      39,102 ounces
      at
      an average realizable price per ounce of approximately $847. Costs applicable
      to
      sales were approximately
      $10,690 for the current period. There were no metal sales for the same period
      in
      the prior year as we had not yet realized revenue from our operations. Our
      cash
      cost and total cost per ounce sold, excluding Royal Gold’s 10% net profit
      interest, formally owned by AngloGold, was $257 and $316, respectively, for
      the
      year ended July 31, 2008. If we factor in this net profit interest cost for
      the
      same period, our cash cost and total cost per ounce sold would be $276 and
      $335,
      respectively. These costs were slightly higher than previous quarter results
      primarily due to the accrual of this net profit interest which is capped at
      $1,000. As of July 31, 2008, we had approximately $753 accrued towards this
      net
      profits interest. We anticipate accruing the remaining portion of
      the net profit interest within this calendar
      year.




Revenues
      from by-product sales (silver) are credited to *Costs
      applicable to sales* as a
      by-product credit. Silver
      sales totaled 40,461 ounces at an average price of $17.48 amounting to
      approximately $707


for
      the
      year ended July 31, 2008.





Depreciation
      and Amortization





Depreciation
      and amortization expense during the year ended July 31, 2008 and 2007 was
      approximately $3,438 and $891, respectively. The increase of approximately
      $2,547 was primarily due to a full year of depreciation and amortization charges
      related to the El Chanate capital costs being incurred in the current period.
      The charges during the same period in the prior year were significantly lower
      as
      most of these assets were placed in service in April 2007. Depreciation and
      amortization also represents deferred financing costs resulting from the Credit
      Facility we entered into with Standard Bank. This accounted for approximately
      $1,088 and $876 of the amortization expense during the years ended July 31,
      2008
      and 2007, respectively.


23


General
      and Administration Expense





General
      and administrative expenses during the year ended July 31, 2008 were
      approximately $5,405, an increase of approximately $2,645 or 96% from the year
      ended July 31, 2007. The increase in general and administrative expenses
      resulted primarily from: 1) higher salaries and wages for officers and employees
      including the hiring of a controller and the awarding of cash bonuses of
      approximately $1,708, 2) the granting of stock options and restricted stock
      to
      our officers and employees under our 2006 Equity Incentive Plan amounting to
      approximately $467, 3) higher investor relations fees and travel fees of
      approximately $221, 4) higher accounting and consulting fees of approximately
      $419 versus the same period a year earlier, primarily due to the awarding of
      a
      cash bonus to one of our officers as well as higher consulting fees related
      to
      compliance with internal control over financial reporting, and 5) an increase
      in
      insurance costs of approximately $116 versus the same period a year earlier
      as
      we were not yet in full production in the prior period. The above mentioned
      increases in compensation, cash bonus awards as well as the stock option and
      restricted stock awards were granted based upon recommendations from an
      independent report on executive compensation. This independent report, requested
      by our Compensation Committee, was obtained in order to assist us in attracting
      and retaining individuals of experience and ability, to provide incentive to
      our
      employees and directors, to encourage employee and director proprietary
      interests in our company, and to encourage employees to remain in our employ.





Exploration
      Expense





Exploration
      expense during the years ended July31, 2008 and 2007 was approximately $938
      and
      $1,816, respectively, or a decrease of $878 or 48%. The primary reason for
      the
      decrease in exploration expense was the result of higher engineering and
      planning costs related to our El Chanate Project being expensed in the prior
      period as well as the costs incurred from our 72-hole reverse circulation
      drilling campaign to identify additional proven and probable gold reserves
      at
      the El Chanate Project which was completed in May 2007. The current period
      includes: 1) costs from our completed 26 hole reverse circulation drilling
      program in December 2007 amounting to 4,912 meters at El Chanate. The drill
      holes were mainly positioned to test the outer limits of the currently known
      ore
      zones, and 2) cost associated with our recently leased 12 mining concessions
      totaling 1,790 hectares located northwest of Saric, Sonora. We initiated a
      short
      drill program as well as some geochemical work related to these claims during
      the current period. Also, a claim has been filed for approximately 2,200
      additional hectares adjacent to this property. These concessions and this claim
      are about a sixty mile drive northeast of the El Chanate project. Mineralization
      is evident throughout and is hosted by shear zones and veins in granite
      intrusive.





Equity
      Based Compensation





Equity
      based compensation during the year ended July 31, 2008 was approximately $181
      as
      compared to $133 in costs for the same period a year earlier. These costs
      primarily represent the equity compensation expense from the issuance of stock
      options for professional services provided to non-employees during the current
      and prior period.





Other
      Income and Expense





Our
      loss
      on the change in fair value of derivative instruments during the year ended
      July
      31, 2008 and 2007, was approximately $1,356 and $1,226, respectively, and was
      reflected as an other expense. **** This
      was
      primarily due to the change in fair value of our two identically structured
      derivative contracts with Standard Bank which correlates to fluctuations in
      the
      gold price. These contracts were not designated as hedging derivatives; and
      therefore, special hedge accounting does not apply.





Interest
      expense was approximately $1,207 for the year ended July 31, 2008 compared
      to
      approximately $792 for the same period a year earlier. This increase was mainly
      due to higher interest charges incurred during the current period related to
      our
      fully outstanding credit facility with Standard Bank. As of July 31, 2008 and
      2007, there was $12,500 outstanding, respectively, on this credit facility.


24


Income
      Tax Expense




Income
      tax expense was $3,507 during the fiscal year ended July 31, 2008, compared
      to
      $0 in 2007 with an effective tax rate of 35% and 0%, respectively. The factors
      that most significantly impact our effective tax rate are valuation allowances
      related to deferred tax assets offset partially by lower statutory tax rates
      in
      Mexico. Current income tax expense and deferred income tax expense amounted
      to
      $2,111 and $1,396 as of July 31, 2008, respectively.




Mining
      operations are primarily conducted in Mexico that has tax laws, tax incentives
      and tax rates that are significantly different than those of the United States.
      On October 1, 2007, the Mexican Government enacted legislation which introduced
      certain tax reforms as well as a new minimum flat tax system.  This new
      flat tax system integrates with the regular income tax system and is based
      on
      cash-basis net income that includes only certain receipts and
      expenditures.  The flat tax is set at 17.5% of cash-basis net income as
      determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
      respectively.  If the flat tax is positive, it is reduced by the regular
      income tax and any excess is paid as a supplement to the regular income
      tax.  If the flat tax is negative, it may serve to reduce the regular
      income tax payable in that year or can be carried forward for a period of up
      to
      ten years to reduce any future flat tax. Companies are required to prepay income
      taxes on a monthly basis based on the greater of the flat tax or regular income
      tax as calculated for each monthly period.  Annualized income projections
      indicate that we will not be liable for any excess flat tax for calendar year
      2008 and, accordingly, have recorded a Mexican income tax provision as of July
      31, 2008.




Deferred
      income tax assets and liabilities are determined based on differences between
      the financial statement reporting and tax bases of assets and liabilities and
      are measured using the enacted tax rates and laws in effect when the differences
      are expected to reverse. The measurement of deferred income tax assets is
      reduced, if necessary, by a valuation allowance for any tax benefits, which,
      on
      a more than likely than not basis, are not expected to be realized. The effect
      on deferred income tax assets and liabilities of a change in tax rates is
      recognized in the period that such tax rate changes are enacted.




During
      the fiscal year ended 2008, we completed a reconciliation of our U.S. book
      and
      tax basis assets and liabilities as well as a detailed analysis of our income
      taxes payable.




Based
      on
      the uncertainty and inherent unpredictability of the factors influencing our
      effective tax rate and the sensitivity of such factors to gold and other metals
      prices as discussed above, the effective tax rate is expected to be volatile
      in
      future periods.




For
      more
      information concerning income taxes, please see Note 22 within the consolidated
      financial statements contained herein.


25


Changes
      in Foreign Exchange Rates





During
      the year ended July 31, 2008 and 2007, we recorded equity adjustments from
      foreign currency translations
      of approximately $622 and $205, respectively. These translation adjustments
      are related
      to changes in the rates of exchange between the Mexican Peso and the US dollar
      and are included as
      a
      component of other comprehensive income.





Summary
      of Annual Results


(000’s
      except per share Data and ounces sold)





For the year
            
            For the yearended
            
            endedJuly 31,
            
            July 31,2008
            
            2007Revenues
            
            
            33,104
            
            
            -Net
                Income (loss)
            
            
            6,364
            
            
            (7,472
            )Basic
                net income (loss) per share
            
            
            0.04
            
            
            (0.05
            )Diluted
                net income (loss) per share
            
            
            0.03
            
            
            -Gold
                ounces sold
            
            
            39,102
            
            
            -Average
                price received
            
            $
            847
            
            
            -Cash
                cost per ounce sold(1)
            
            $
            276
            
            
            -Total
                cost per ounce sold(1)
            
            $
            335
            
            
            -


(1)   Excluding
      the net profit interest, cash and total cost per ounce sold were $257 and $316,
      respectively.





Fiscal
      year ended July 31, 2007 compared to fiscal year ended July 31,
      2006





Net
      Loss





Our
      net
      loss for the fiscal year ended July 31, 2007 was approximately $7,472, an
      increase of approximately $2,667 or 56% from the fiscal year ended July 31,
      2006. As discussed below, the primary reasons for the increase in loss during
      the fiscal year ended July 31, 2007 were: 1) an increase in selling, general
      and
      administrative expenses of approximately $625; 2) an increase in depreciation
      and amortization expense of approximately $  852;
      3)
      an increase in exploration expenditures of approximately $808; 4) an increase
      in
      losses of approximately $644 due to the change in fair value of our derivative
      instruments; and 5) an increase in interest expense of approximately $792.
      These
      increases in loss were slightly offset by a decrease in mine expenses of
      approximately $933 due to higher planning and engineering costs being expensed
      in the prior fiscal year. Net loss per share was $.05 and $.04 for the fiscal
      year ended July 31, 2007 and 2006, respectively.





Revenues





We
      generated no revenues from mining operations during the fiscal year ended July
      31, 2007 and 2006. There were de minimis non-operating revenues during the
      fiscal year ended July 31, 2007 and 2006 of approximately $146 and $184,
      respectively. These non-operating revenues primarily represent interest
      income.


26


Mine
      Expenses





Mine
      expenses during the fiscal year ended July 31, 2007 were $1,008, a decrease
      of
      $933 or 48% from the fiscal year ended July 31, 2006. Mine expenses were lower
      in 2007 versus the same period a year earlier primarily due to higher
      engineering and planning costs related to our El Chanate Project being expensed
      in the prior period.





Selling,
      General and Administration Expense





Selling,
      general and administrative expenses during the fiscal year ended July 31, 2007
      were $2,760, an increase of approximately $625 or 29% from the fiscal year
      ended
      July 31, 2006. The increase in selling, general and administrative expenses
      resulted primarily from higher salaries and wages, higher professional and
      consulting fees as well as an increase in insurance costs versus the same period
      a year earlier.





Equity
      Based Compensation





Equity
      based compensation during the fiscal year ended July 31, 2007 was $133 as
      compared to $89 in costs for the same period a year earlier. This increase
      primarily resulted from the issuance of stock options to our independent
      directors, SEC counsel, and outside Canadian Counsel as well as an issuance
      of
      shares of common stock to an independent contractor for services provided
      related to our El Chanate project.





Exploration
      Expense





Exploration
      expense during the fiscal year ended July 31, 2007 and 2006 was approximately
      $808 and $0, respectively. The primary reason for the increase can be attributed
      to our 72-hole drilling campaign to determine additional proven and probable
      gold reserves at the El Chanate Project.





Depreciation
      and Amortization





Depreciation
      and amortization expense during the fiscal year ended July 31, 2007 and 2006
      was
      approximately $891 and $39, respectively. The primary reason for the increase
      was due to amortization charges on deferred financing costs resulting from
      the
      Credit Facility entered into in August 2006 with Standard Bank Plc. This
      accounted for approximately $876 of the amortization expense during the fiscal
      year ended July 31, 2007.





Other
      Income and Expense





Our
      loss
      on the change in fair value of derivative instruments during the fiscal year
      ended July 31, 2007 and 2006, was approximately $1,226 and $582,
      respectively. **** This
      was
      primarily due to us entering into two identically structured derivative
      contracts with Standard Bank in March 2006. Each derivative consisted of a
      series of forward sales of gold and a purchase gold cap. We agreed to sell
      a
      total volume of 121,927 ounces of gold forward to Standard Bank at a price
      of
      $500 per ounce on a quarterly basis during the period from March 2007 to
      September 2010. We also agreed to a purchase gold cap on a quarterly basis
      during this same period and at identical volumes covering a total volume of
      121,927 ounces of gold at a price of $535 per ounce. While the period of the
      derivative contracts has commenced, we do not anticipate any material adverse
      effect from the fact that we have not commenced to sell gold because the price
      of gold is substantially above $535 per ounce. Under FASB Statement No. 133,
      “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”),
      these contracts must be carried on the balance sheet at their fair value, with
      changes to the fair value of these contracts reflected as *Other
      Income or Expense.* These
      contracts were not designated as hedging derivatives; and therefore, special
      hedge accounting does not apply.


27


The
      first
      derivative was entered into on March 1, 2006 for a premium of $550; and the
      second was entered into on March 30, 2006 for a premium of $250. The gold price
      rose sharply in the second quarter 2006, and was the primary reason for the
      decrease in premium on the derivative contracts. The change in fair value during
      the fiscal year ended July 31, 2007 reduced the carrying value on these
      derivative contracts by approximately $1,226, and was reflected as an other
      expense during the 2007 period.





Interest
      expense was approximately $792 for the fiscal year ended July 31, 2007 compared
      to $0 for the same period in 2006. This increase was mainly due to interest
      expense associated with our outstanding balances on our draw downs associated
      with the Credit Facility entered into in August 2006 with Standard Bank Plc
      related to project costs for our El Chanate Project.





**Liquidity
      and Capital Resources**




***Operating
      activities***




*Cash
      provided by operating activities* during
      the year ended July 31, 2008 was approximately $6,318, which primarily
      represents cash flows resulting from our realization
      of revenue from operations during the year ended July 31, 2008.  *Cash
      used in operating activities* for the
      same period a year ago was $3,663 as we had not yet been realizing revenue
      from
      operations.




***Investing
      Activities***




*Cash
      used in investing activities* during
      the year ended July31, 2008, amounted to approximately $5,479, primarily from
      the leach pad expansion and the acquisition of equipment, including additional
      conveyors and ADR plant equipment, as well as additional water rights related
      to
      our El Chanate Project. *Cash
      used in investing activities* for
      the
      same period a year ago was approximately $18,425 which directly related to
      the
      development of the El Chanate mine.




***Financing
      Activities***




*Cash
      provided by financing activities* during
      the year ended July 31, 2008 amounted to approximately $7,306, primarily from
      the exercising of 22,994,178 warrants for gross proceeds of approximately
      $7,474. *Cash
      provided by financing activities* for the
      same period a year ago was approximately $21,367 which mostly comprised of
      the
      full draw down of our credit facility of $12,500 and proceeds received of
      approximately $3,486 from the issuance of common stock in private placements
      and
      $5,643 from the issuance of common stock upon the exercising of 22,203,909
      warrants.




***Term
      loan and Revolving Credit Facility***




On
      July
      17, 2008, we closed in escrow pending execution of Mexican collateral documents
      and certain other ministerial matters, an Amended And Restated Credit Agreement
      (the “Credit Agreement”) involving our wholly-owned Mexican subsidiaries MSR and
      Oro, as borrowers (“Borrowers”), us, as guarantor, and Standard Bank PLC
      (“Standard Bank”), as the lender. The Mexican collateral documents were executed
      on September 18, 2008, effectively closing the loan. The Credit Agreement amends
      and restates the prior credit agreement between the parties dated August 15,
      2006 (the “Original Agreement”). Under the Original Agreement, MSR and Oro could
      borrow, and did borrow, money in an aggregate principal amount of up to $12,500
      (the “Term Loan”) for the purpose of constructing, developing and operating the
      El Chanate gold mining project in Sonora State, Mexico. We guaranteed the
      repayment of the Term Loan and the performance of the obligations under the
      Original Agreement.


28


The
      Credit Agreement establishes a new senior secured revolving credit facility
      that
      permits Borrowers to borrow up to $5,000 during the one year period after the
      closing of the Credit Agreement. The Borrowers may request a borrowing of the
      Revolving Commitment from time to time, provided that the Borrowers are not
      entitled to request a borrowing more than once in any calendar month (each
      borrowing a “Revolving Loan”). Repayment of the Revolving Loans will be secured
      and guaranteed in the same manner as the Term Loan. Term Loan principal shall
      be
      repaid quarterly commencing on September 30, 2008 and consisting of four
      payments in the amount of $1,125, followed by eight payments in the amount
      of
      $900 and two final payments in the amount of $400. There is no prepayment fee.
      Principal under the Term Loan and the Revolving Loans shall bear interest at
      a
      rate per annum equal to the LIBO Rate, as defined in the Credit Agreement,
      for
      the applicable Interest Period plus the Applicable Margin. An Interest Period
      can be one, two, three or six months, at the option of the Borrowers. The
      Applicable Margin for the Term Loan and the Revolving Loans is 2.5% per annum
      and 2.0% per annum, respectively. The Borrowers are required to pay a commitment
      fee in respect of the Revolving Commitment at the rate of 1.5% per annum on
      the
      average daily unused portion of the Revolving Commitment. Pursuant to the terms
      of the Original Credit Agreement, Standard Bank exercised significant control
      over the operating accounts of MSR located in Mexico and in the United States.
      Standard Bank’s control over the accounts has been lifted significantly under
      the terms of the Credit Agreement, giving the Borrowers authority to exercise
      primary day-to-day control over the accounts. However, the accounts remain
      subject to an account pledge agreement between MSR and Standard Bank.





***Debt
      Covenants***





Our
      Credit Facility with Standard Bank requires us, among other obligations, to
      meet
      certain financial covenants including (i) a ratio of current assets to current
      liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly
      minimum tangible net worth at all times of at least U.S.$15,000,000, and (iii)
      a
      quarterly average minimum liquidity of U.S.$500,000. In addition, the Credit
      Facility restricts, among other things, our ability to incur additional debt,
      create liens on our property, dispose of any assets, merge with other companies,
      enter into hedge agreements, organize or invest in subsidiaries or make any
      investments above a certain dollar limit. A failure to comply with the
      restrictions contained in the Credit Facility could lead to an event of default
      thereunder which could result in an acceleration of such indebtedness.





In
      connection with the refinance proceedings, MSR, as a condition precedent to
      closing, obtained a waiver letter from the Lender of any default or event of
      default as a result of not being in compliance with regulations of Mexican
      federal law with regard to certain filing and environmental bonding issues
      in
      connection with the operation of mining the El Chanate concessions as well
      as
      certain insurance requirements. MSR has not yet complied with these regulations
      due to the absence of professionals in the area qualified to conduct studies
      to
      facilitate compliance. MSR believes that the Mexican government is aware of
      these barriers to compliance and that it has not enforced the Requirements
      against MSR or other mining companies in Sonora. MSR has agreed to make a
      commercially reasonable effort to come into compliance with these requirements.
      See also “ *Environmental
      and Permitting Issues* ”
section
      below.




As
      of
      July 31, 2008, except for the aforementioned waiver, we and our related entities
      were in compliance with all debt covenants and default provisions.


29







***Environmental
      and Permitting Issues***





Management
      does not expect that environmental issues will have an adverse material effect
      on our liquidity or earnings. In Mexico, although we must continue to comply
      with laws, rules and regulations concerning mining, environmental, health,
      zoning and historical preservation issues, we are not aware of any significant
      environmental concerns or existing reclamation requirements at the El Chanate
      concessions. We received the required Mexican government permits for
      construction, mining and processing the El Chanate ores in January 2004. The
      permits were extended in June 2005. Pursuant to the extensions, once we file
      a
      notice that work has commenced, we have one year to prepare the site and
      construct the mine and seven years to mine and process ores from the site.
      We
      filed the notice on June 1, 2006. Once we revise our new mine plan based on
      the
      2007 Report, we will work to extend the permits for mining and processing for
      the new life of mine. See also “ *Debt
      Covenants* ”
      above.





We
      received the renewable explosive permit from the government that expires on
      December 31, 2008 and is renewable annually.





We
      do
      include in all our internal revenue and cost projections a certain amount for
      environmental and reclamation costs on an ongoing basis. No assurance can be
      given that environmental regulations will not be changed in a manner that would
      adversely affect our planned operations. We estimated the reclamation costs
      for
      the El Chanate site to be approximately $2,300. Reclamation costs are allocated
      to expense over the life of the related assets and are periodically adjusted
      to
      reflect changes in the estimated present value resulting from the passage of
      time and revisions to the estimates of either the timing or amount of the
      reclamation and closure costs. The asset retirement obligation is based on
      when
      the spending for an existing environmental disturbance and activity to date
      will
      occur. We review, on an annual basis, unless otherwise deemed necessary, the
      asset retirement obligation at each mine site. We reviewed the estimated present
      value of the El Chanate mine reclamation and abandonment costs as of July 31,
      2008. This review resulted in an increase in the Asset Retirement Obligation
      by
      approximately $293. As of July 31, 2008 and 2007, approximately $1,666 and
      $1,249, respectively, was accrued for reclamation obligations relating to
      mineral properties in accordance with SFAS No. 143, “Accounting for Asset
      Retirement Obligations.”





We
      own
      properties in Leadville, Colorado for which we have previously recorded an
      impairment loss. Part of the Leadville Mining District has been declared a
      federal Superfund site under the Comprehensive Environmental Response,
      Compensation and Liability Act of 1980, and the Superfund Amendments and
      Reauthorization Act of 1986. Several mining companies and one individual were
      declared defendants in a possible lawsuit. We were not named a defendant or
      Principal Responsible Party. We did respond in full detail to a lengthy
      questionnaire prepared by the Environmental Protection Agency ("EPA") regarding
      our proposed procedures and past activities in November 1990. To our knowledge,
      the EPA has initiated no further comments or questions. The Division of
      Reclamation, Mining and Safety of the State of Colorado (the “Division”)
      conducted its most recent inspection of our Leadville Mining properties in
      August 2007. The Division concluded that based upon 2007 equipment prices and
      labor costs, an additional $46 was necessary to be bonded with the Division
      to
      reclaim the site to achieve the approved post-mining land use. The total amount
      of the bond sufficient to perform reclamation as of July31, 2008, is
      approximately $82. We have met this bonding requirement. During our
      4 th fiscal
      quarter ended July 31, 2008, we sold two of the Leadville Mining claims and
      the
      mill for gross proceeds of $100 which was recorded within other income and
      expense.





30





***Contractual
      Obligations***





Our
      contractual obligations as of July 31, 2008 are summarized as
      follows:





Payments Due by PeriodContractual Obligations
            
            Total
            
            Less than
              1 Year
            
            1 – 3
              Years
            
            3 – 5
              Years
            
            More than
              5 YearsDebt(1)
            
            $
            13,500
            
            $
            5,125
            
            $
            8,375
            
            $
            -
            
            $
            -Remediation
                and reclamation obligations(2)
            
            
            3,751
            
            
            -
            
            
            -
            
            
            -
            
            
            3,751Operating
                leases(3)
            
            
            585
            
            
            132
            
            
            440
            
            
            13
            
            
            -Derivative
                instruments(4)
            
            
            2,626
            
            
            1,177
            
            
            1,449
            
            
            -
            
            
            -Minimum
                royalty payments(5)
            
            
            1,000
            
            
            1,000
            
            
            -
            
            
            -
            
            
            -$
            21,462
            
            $
            7,434
            
            $
            10,264
            
            $
            13
            
            $
            3,751




(1)
            Amounts
                represent principal ($12,500) and estimated interest payments ($1,000)
                assuming no early extinguishment.


(2)
            Mining
                operations are subject to extensive environmental regulations in
                the
                jurisdictions in which they operate. Pursuant to environmental
                regulations, we are required to close our operations and reclaim
                and
                remediate the lands that operations have disturbed. The estimated
                undiscounted cash outflows of these remediation and reclamation
                obligations are reflected here. For more information regarding remediation
                and reclamation liabilities, see Note 13 to the Consolidated Financial
                Statements.


(3)
            Amount
                represent a non-cancelable operating lease for office space in NYC
                that
                commenced on September 1, 2007 and terminates on August 31, 2012.
                In
                addition to base rent, the lease calls for payment of utilities and
                other
                occupancy costs.


(4)
            Amounts
                represent the net cash settlement of 75,044 ounces of gold at $35
                per
                ounce.


(5)
            Amount
                represents the payment of the 10% net profits interest on the El
                Chanate
                mining concessions which is capped at $1,000. This does not include
                the
                net smelter return payments as this payment is linked to the gold
                price
                and cannot be reasonable estimated given variable market
                conditions.





While
      we
      believe that our available funds in conjunction with anticipated revenues from
      gold sales will be adequate to cover capital expenditures, debt service,
      royalties, net cash settlements on our gold price protection agreement as well
      as operating activities at El Chanate and corporate general and administrative
      expenses for fiscal 2009, if we encounter unexpected problems we may need to
      raise additional capital. We also may need to raise additional capital for
      significant property acquisitions and/or exploration activities. To the extent
      that we need to obtain additional capital, management intends to raise such
      funds through the sale of our securities and/or joint venturing with one or
      more
      strategic partners. We cannot assure that adequate additional funding, if
      needed, will be available. If we need additional capital and we are unable
      to
      obtain it from outside sources, we may be forced to reduce or curtail our
      operations or our anticipated exploration activities.





**New
      Accounting Pronouncements**





***Fair
      Value Option***





On
      February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
      for Financial Assets and Financial Liabilities - Including an Amendment of
      FASB
      Statement No. 115. This standard permits an entity to choose to measure many
      financial instruments and certain other items at fair value. This option is
      available to all entities, including not-for-profit organizations. Most of
      the
      provisions in Statement 159 are elective; however, the amendment to FASB
      Statement No. 115, Accounting for Certain Investments in Debt and Equity
      Securities, applies to all entities with available-for-sale and trading
      securities. Some requirements apply differently to entities that do not report
      net income. The FASB's stated objective in issuing this standard is as follows:
      "to improve financial reporting by providing entities with the opportunity
      to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions".




31




The
      fair
      value option established by Statement 159 permits all entities to choose to
      measure eligible items at fair value at specified election dates. A business
      entity will report unrealized gains and losses on items for which the fair
      value
      option has been elected in earnings (or another performance indicator if the
      business entity does not report earnings) at each subsequent reporting date.
      A
      not-for-profit organization will report unrealized gains and losses in its
      statement of activities or similar statement. The fair value option: (a) may
      be
      applied instrument by instrument, with a few exceptions, such as investments
      otherwise accounted for by the equity method; (b) is irrevocable (unless a
      new
      election date occurs); and (c) is applied only to entire instruments and not
      to
      portions of instruments.





Statement
      159 is effective as of the beginning of an entity's first fiscal year that
      begins after November 15, 2007.  We elected not to adopt the fair value
      option for any eligible instruments.





***Noncontrolling
      Interests***





On
      December 4, 2007, the FASB issued FASB Statement No. 160, *“Noncontrolling
      Interests in Consolidated Financial Statements - An Amendment of ARB No.
      51.”* Statement 160 establishes new accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary. Specifically, this statement requires the recognition of a
      noncontrolling interest (minority interest) as equity in the consolidated
      financial statements and separate from the parent's equity. The amount of net
      income attributable to the noncontrolling interest will be included in
      consolidated net income on the face of the income statement. Statement 160
      clarifies that changes in a parent's ownership interest in a subsidiary that
      do
      not result in deconsolidation are equity transactions if the parent retains
      its
      controlling financial interest. In addition, this statement requires that a
      parent recognize a gain or loss in net income when a subsidiary is
      deconsolidated. Such gain or loss will be measured using the fair value of
      the
      noncontrolling equity investment on the deconsolidation date. Statement 160
      also
      includes expanded disclosure requirements regarding the interests of the parent
      and its noncontrolling interest.




Statement
      160 is effective for fiscal years, and interim periods within those fiscal
      years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
      We believe adoption of this standard will not have an impact on the financial
      condition or the results of our operations.





***Derivative
      Instruments and Hedging Activities***





On
      April
      21, 2008, the FASB posted a revised FASB Statement No. 133 Implementation
      guidance for Issues I1, Interaction of the Disclosure Requirements of Statement
      133 and Statement 47, and K4, Miscellaneous: Income Statement Classification
      of
      Hedge Ineffectiveness and the Component of a Derivative's Gain or Loss Excluded
      from the Assessment of Hedge Effectiveness. The revisions relate to the issuance
      of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging
      Activities. We believe adoption of this standard will not have a material impact
      on the financial condition or the results of our operations.





***Hierarchy
      of Generally Accepted Accounting Principles***





The
      FASB
      has issued FASB Statement No. 162, *The
      Hierarchy of Generally Accepted Accounting Principles.* Statement 162 is intended to improve financial reporting by identifying a
      consistent framework, or hierarchy, for selecting accounting principles to
      be
      used in preparing financial statements that are presented in conformity with
      U.S. generally accepted accounting principles for nongovernmental entities.
      The
      hierarchy under Statement 162 is as follows:




32




*
      FASB
      Statements of Financial Accounting Standards and Interpretations, FASB Statement
      133 Implementation Issues, FASB Staff Positions, AICPA Accounting Research
      Bulletins and Accounting Principles Board Opinions that are not superseded
      by
      actions of the FASB, and Rules and interpretive releases of the SEC for SEC
      registrants.




*
      FASB
      Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
      Accounting Guides and Statements of Position.




*
      AICPA
      Accounting Standards Executive Committee Practice Bulletins that have been
      cleared by the FASB, consensus positions of the EITF, and Appendix D EITF
      topics.




Statement
      162 is effective 60 days following the SEC's approval of the PCAOB amendments
      to
      AU Section 411, *The
      Meaning of Present Fairly in Conformity with Generally Accepted Accounting
      Principles.* Since
      Statement 162 is only effective for nongovernmental entities, the GAAP hierarchy
      will remain in AICPA Statement on Auditing Standards (SAS) No. 69, *The
      Meaning of "Present Fairly in Conformity with Generally Accepted Accounting
      Principles" in the Independent Auditor's Report,* for
      state and local governmental entities and federal governmental entities. We
      believe the adoption of this standard will not have a material impact on the
      financial condition or the results of our operations.





***Accounting
      for Financial Guarantee Insurance Contracts***





The
      FASB
      issued FASB Statement No. 163, *Accounting
      for Financial Guarantee Insurance Contracts.* This new
      standard clarifies how FASB Statement No. 60, *Accounting
      and Reporting by Insurance Enterprises,* applies
      to financial guarantee insurance contracts issued by insurance enterprises,
      including the recognition and measurement of premium revenue and claim
      liabilities. It also requires expanded disclosures about financial guarantee
      insurance contracts. Statement 163 is effective for financial statements issued
      for fiscal years beginning after December 15, 2008, and all interim periods
      within those fiscal years, except for disclosures about the insurance
      enterprise's risk-management activities, which are effective the first period
      (including interim periods) beginning after May 23, 2008. Except for the
      required disclosures, earlier application is not permitted. We believe the
      adoption of this standard will not have an impact on the financial condition
      or
      the results of our operations.





**Disclosure
      About Off-Balance Sheet Arrangements**





We
      do not
      have any transactions, agreements or other contractual arrangements that
      constitute off-balance sheet arrangements.





**Critical
      Accounting Policies**





Our
      financial statements and accompanying notes are prepared in accordance with
      accounting principles generally accepted in the United States of America.
      Preparing financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets, liabilities, revenue,
      and expenses. These estimates and assumptions are affected by management’s
      application of accounting policies. Critical accounting policies for us include
      inventory, revenue recognition, property, plant and mine development, impairment
      of long-lived assets, accounting for equity-based compensation, environmental
      remediation costs and accounting for derivative and hedging activities.





33




Ore
      on
      Leach Pads and Inventories (“In-Process Inventory”)




Costs
      that are incurred in or benefit the productive process are accumulated as ore
      on
      leach pads and inventories. Ore on leach pads and inventories are carried at
      the
      lower of average cost or net realizable value. Net realizable value represents
      the estimated future sales price of the product based on current and long-term
      metals prices, less the estimated costs to complete production and bring the
      product to sale. Write-downs of ore on leach pads and inventories, resulting
      from net realizable value impairments, are reported as a component of *Costs
      applicable to sales* .
      The
      current portion of ore on leach pads and inventories is determined based on
      the
      expected amounts to be processed within the next 12 months. Ore on leach pads
      and inventories not expected to be processed within the next 12 months are
      classified as long-term. The major classifications are as follows:




*Ore
      on Leach Pads*




The
      recovery of gold from certain gold oxide is achieved through the heap leaching
      process. Under this method, oxide ore is placed on leach pads where it is
      treated with a chemical solution, which dissolves the gold contained in the
      ore.
      The resulting “pregnant” solution is further processed in a plant where the gold
      is recovered. Costs are added to ore on leach pads based on current mining
      costs, including applicable depreciation, depletion and amortization relating
      to
      mining operations. Costs are removed from ore on leach pads as ounces are
      recovered based on the average cost per estimated recoverable ounce of gold
      on
      the leach pad.




The
      estimates of recoverable gold on the leach pads are calculated from the
      quantities of ore placed on the leach pads (measured tons added to the leach
      pads), the grade of ore placed on the leach pads (based on assay data) and
      a
      recovery percentage (based on ore type). In general, leach pads recover
      approximately 50% to 75% of the recoverable ounces in the first year of
      leaching, declining each year thereafter until the leaching process is complete.




Although
      the quantities of recoverable gold placed on the leach pads are reconciled
      by
      comparing the grades of ore placed on pads to the quantities of gold actually
      recovered (metallurgical balancing), the nature of the leaching process
      inherently limits the ability to precisely monitor inventory levels. As a
      result, the metallurgical balancing process needs to be constantly monitored
      and
      estimates need to be refined based on actual results over time. Our operating
      results may be impacted by variations between the estimated and actual
      recoverable quantities of gold on its leach pads. Variations between actual
      and
      estimated quantities resulting from changes in assumptions and estimates that
      do
      not result in write-downs to net realizable value will be accounted for on
      a
      prospective basis.




*In-process
      Inventory*




In-process
      inventories represent materials that are currently in the process of being
      converted to a saleable product. Conversion processes vary depending on the
      nature of the ore and the specific processing facility, but include mill
      in-circuit, leach in-circuit, flotation and column cells, and carbon in-pulp
      inventories. In-process material are measured based on assays of the material
      fed into the process and the projected recoveries of the respective plants.
      In-process inventories are valued at the average cost of the material fed into
      the process attributable to the source material coming from the mines,
      stockpiles and/or leach pads plus the in-process conversion costs, including
      applicable depreciation relating to the process facilities incurred to that
      point in the process.




34




*Precious
      Metals Inventory*




Precious
      metals inventories include gold doré and/or gold bullion. Precious metals that
      result from our mining and processing activities are valued at the average
      cost
      of the respective in-process inventories incurred prior to the refining process,
      plus applicable refining costs.




*Materials
      and Supplies*




Materials
      and supplies are valued at the lower of average cost or net realizable value.
      Cost includes applicable taxes and freight.




Property,
      Plant and Mine Development




Expenditures
      for new facilities or equipment and expenditures that extend the useful lives
      of
      existing facilities or equipment are capitalized and depreciated using the
      straight-line method at rates sufficient to depreciate such costs over the
      estimated productive lives, which do not exceed the related estimated mine
      lives, of such facilities based on proven and probable reserves.




Mineral
      exploration costs are expensed as incurred. When it has been determined that
      a
      mineral property can be economically developed as a result of establishing
      proven and probable reserves, costs incurred prospectively to develop the
      property will be capitalized as incurred and are amortized using the
      units-of-production (“UOP”) method over the estimated life of the ore body based
      on estimated recoverable ounces or pounds in proven and probable reserves.




Impairment
      of Long-Lived Assets




We
      review
      and evaluate our long-lived assets for impairment when events or changes in
      circumstances indicate that the related carrying amounts may not be recoverable.
      An impairment is considered to exist if the total estimated future cash flows
      on
      an undiscounted basis are less than the carrying amount of the assets, including
      goodwill, if any. An impairment loss is measured and recorded based on
      discounted estimated future cash flows. Future cash flows are estimated based
      on
      quantities of recoverable minerals, expected gold and other commodity prices
      (considering current and historical prices, price trends and related factors),
      production levels and operating costs of production and capital, all based
      on
      life-of-mine plans. Existing proven and probable reserves and value beyond
      proven and probable reserves, including mineralization other than proven and
      probable reserves and other material that is not part of the measured, indicated
      or inferred resource base, are included when determining the fair value of
      mine
      site reporting units at acquisition and, subsequently, in determining whether
      the assets are impaired. The term “recoverable minerals” refers to the estimated
      amount of gold or other commodities that will be obtained after taking into
      account losses during ore processing and treatment. Estimates of recoverable
      minerals from such exploration stage mineral interests are risk adjusted based
      on management’s relative confidence in such materials. In estimating future cash
      flows, assets are grouped at the lowest level for which there are identifiable
      cash flows that are largely independent of future cash flows from other asset
      groups. Our estimates of future cash flows are based on numerous assumptions
      and
      it is possible that actual future cash flows will be significantly different
      than the estimates, as actual future quantities of recoverable minerals, gold
      and other commodity prices, production levels and operating costs of production
      and capital are each subject to significant risks and uncertainties.




35




Reclamation
      and Remediation Costs (Asset Retirement Obligations)




Reclamation
      costs are allocated to expense over the life of the related assets and are
      periodically adjusted to reflect changes in the estimated present value
      resulting from the passage of time and revisions to the estimates of either
      the
      timing or amount of the reclamation and abandonment costs. The asset retirement
      obligation is based on when the spending for an existing environmental
      disturbance and activity to date will occur. We review, on an annual basis,
      unless otherwise deemed necessary, the asset retirement obligation at our mine
      site in accordance with FASB FAS No. 143, “Accounting for Asset Retirement
      Obligations.”





Deferred
      Financing Costs





Deferred
      financing costs which were included in other assets and a component of
      stockholders’ equity relate to costs incurred in connection with bank borrowings
      and are amortized over the term of the related borrowings.





Intangible
      Assets





Purchased
      intangible assets consisting of rights of way, easements and net profit
      interests are carried at cost less accumulated amortization. Amortization is
      computed using the straight-line method over the economic lives of the
      respective assets, generally five years or using the units of production method.
      It is our policy to assess periodically the carrying amount of our purchased
      intangible assets to determine if there has been an impairment to their carrying
      value. Impairments of other intangible assets are determined in accordance
      with
      SFAS 144. There was no impairment at July 31, 2008.





Fair
      Value of Financial Instruments





The
      carrying value of our financial instruments, including cash and cash
      equivalents, loans receivable and accounts payable approximated fair value
      because of the short maturity of these instruments.





Revenue
      Recognition





Revenue
      is recognized from a sale when the price is determinable, the product has been
      delivered, the title has been transferred to the customer and collection of
      the
      sales price is reasonably assured.





Equity
      Based Compensation





In
      connection with offers of employment to our executives as well as in
      consideration for agreements with certain consultants, we issue options and
      warrants to acquire our common stock. Employee and non-employee awards are
      made
      in the discretion of the Board of Directors.





Effective
      February 1, 2006, we adopted the provisions of SFAS No. 123R. Under FAS 123R,
      share-based compensation cost is measured at the grant date, based on the
      estimated fair value of the award, and is recognized as expense over the
      requisite service period. We adopted the provisions of FAS 123R using a modified
      prospective application. Under this method, compensation cost is recognized
      for
      all share-based payments granted, modified or settled after the date of
      adoption, as well as for any unvested awards that were granted prior to the
      date
      of adoption. Prior periods are not revised for comparative purposes. Because
      we
      previously adopted only the pro forma disclosure provisions of SFAS 123, we
      will
      recognize compensation cost relating to the unvested portion of awards granted
      prior to the date of adoption, using the same estimate of the grant-date fair
      value and the same attribution method used to determine the pro forma
      disclosures under SFAS 123, except that forfeitures rates will be estimated
      for
      all options, as required by FAS 123R.




36




Accounting
      for Derivatives and Hedging Activities





We
      entered into two identically structured derivative contracts with Standard
      Bank
      in March 2006. Each derivative consisted of a series of forward sales of gold
      and a purchase gold cap. We agreed to sell a total volume of 121,927 ounces
      of
      gold forward to Standard Bank at a price of $500 per ounce on a quarterly basis
      during the period from March 2007 to September 2010. We also agreed to a
      purchase gold cap on a quarterly basis during this same period and at identical
      volumes covering a total volume of 121,927 ounces of gold at a price of $535
      per
      ounce. Although these contracts are not designated as hedging derivatives,
      they
      serve an economic purpose of protecting us from the effects of a decline in
      gold
      prices. Because they are not designated as hedges, however, special hedge
      accounting does not apply. Derivative results are simply marked to market
      through earnings, with these effects recorded in *other
      income* or *other
      expense* ,
      as
      appropriate under FASB Statement No. 133, “Accounting for Derivative Instruments
      and Hedging Activities” (“FAS 133”). ****





On
      October 11, 2006, prior to our initial draw on the Credit Facility, we entered
      into interest rate swap agreements in accordance with the terms of the Credit
      Facility, which requires that we hedge at least 50 percent of our outstanding
      debt under this facility. The agreements entered into cover $9,375,000 or 75%
      of
      the outstanding debt. Both swaps covered this same notional amount of
      $9,375,000, but over different time horizons. The first covered the six months
      that commenced on October 11, 2006 and terminated on March 31, 2007 and the
      second covers the period from March 30, 2007 through December 31, 2010. We
      intend to use discretion in managing this risk as market conditions vary over
      time, allowing for the possibility of adjusting the degree of hedge coverage
      as
      we deem appropriate. However, any use of interest rate derivatives will be
      restricted to use for risk management purposes.





We
      use
      variable-rate debt to finance a portion of the El Chanate Project. Variable-rate
      debt obligations expose us to variability in interest payments due to changes
      in
      interest rates. As a result of these arrangements, we will continuously monitor
      changes in interest rate exposures and evaluate hedging opportunities. Our
      risk
      management policy permits us to use any combination of interest rate swaps,
      futures, options, caps and similar instruments, for the purpose of fixing
      interest rates on all or a portion of variable rate debt, establishing caps
      or
      maximum effective interest rates, or otherwise constraining interest expenses
      to
      minimize the variability of these effects.





The
      interest rate swap agreements will be accounted for as cash flow hedges, whereby
      “effective” hedge gains or losses are initially recorded in other comprehensive
      income and later reclassified to the interest expense component of earnings
      coincidently with the earnings impact of the interest expenses being hedged.
      “Ineffective” hedge results are immediately recorded in earnings also under
      interest expense. No component of hedge results will be excluded from the
      assessment of hedge effectiveness.





We
      are
      exposed to credit losses in the event of non-performance by counterparties
      to
      these interest rate swap agreements, but we do not expect any of the
      counterparties to fail to meet their obligations. To manage credit risks, we
      select counterparties based on credit ratings, limit our exposure to a single
      counterparty under defined guidelines, and monitor the market position with
      each
      counterparty as required by SFAS 133.





37





**Item
              7A.**
            **Quantitative
                and Qualitative Disclosures About Market Risk******




***Metal
      Price***




Changes
      in the market price of gold significantly affect our profitability and cash
      flow. Gold prices can fluctuate widely due to numerous factors, such as demand;
      forward selling by producers; central bank sales, purchases and lending;
      investor sentiment; the relative strength of the U.S. dollar and global mine
      production levels.




***Foreign
      Currency***




Changes
      in the foreign currency exchange rates in relation to the U.S. dollar may affect
      our profitability and cash flow. Foreign currency exchange rates can fluctuate
      widely due to numerous factors, such as supply and demand for foreign and U.S.
      currencies and U.S. and foreign country economic conditions. Most of our assets
      and operations are solely in Mexico; and therefore, we are more susceptible
      to
      fluctuations in the Mexican peso / US dollar exchange. Our Mexico operations
      sell their metal production based on a U.S. dollar gold price as is the general,
      world-wide convention. Fluctuations in the local currency exchange rates in
      relation to the U.S. dollar can increase or decrease profit margins to the
      extent costs are paid in local currency at foreign operations. Foreign currency
      exchange rates in relation to the U.S. dollar have not had a material impact
      on
      our determination of proven and probable reserves. However, if a sustained
      weakening of the U.S. dollar in relation to the Mexican peso that impact our
      cost structure, were not mitigated by offsetting increases in the U.S. dollar
      gold price or by other factors, profitability, cash flows and the amount of
      proven and probable reserves in the applicable foreign country could be reduced.
      The extent of any such reduction would be dependent on a variety of factors
      including the length of time of any such weakening of the U.S. dollar, and
      management’s long-term view of the applicable exchange rate. We believe,
      however, that this exchange rate variability has not had a material impact
      on
      our financial statements.





***Gold
      Price Protection Agreement***





In
      March
      2006, we entered into a gold price protection arrangement with Standard Bank
      to
      protect us against future declines in the price of gold. We agreed to a series
      of gold forward sales and call option purchases in anticipation of entering
      into
      the Credit Facility. Under the price protection agreement, we have agreed to
      forward sales for a total volume of 121,927 ounces of gold forward to Standard
      Bank at a price of $500 per ounce. These forward sales were to be settled
      quarterly over the period from March 2007 to September 2010. We also purchased
      call options from Standard Bank enabling the right to purchase gold on the
      same
      quarterly basis for the same total volume with a strike price of $535 per ounce.
      Together, these forward sales and call options serve to put a floor on our
      gold
      sales price and thereby protect us from the effects of the market price falling
      below $535 per ounce, while allowing us to enjoy the upside of higher gold
      prices. To date, the we have net settled these contracts, making cash payments
      reflecting the difference between the call option purchase price of $535 and
      the
      forward sale price of $500, or $35.00 per oz on the volume prescribed by the
      contracts.





The
      total
      contractual ounces to settle and cash payments remaining on the gold price
      protection agreement are as follows (000’s):





Fiscal year ending:
            
            Ounces Remaining
            
            Amount2009
            
            
            33,638
            
            $
            1,1772010
            
            
            33,176
            
            $
            1,1612011
            
            
            8,230
            
            $
            288Total
            
            
            75,044
            
            $
            2,626




38




***Interest
      Rate Swap Contracts***





On
      October 11, 2006, prior to our initial draw on the Credit Facility, we entered
      into interest rate swap agreements in accordance with the terms of the Credit
      Facility. Although the Credit Facility requires that we hedge at least 50%
      of
      our outstanding debt under this facility, we elected to cover $9,375 or 75%
      of
      the outstanding debt. The termination date on our existing swap position is
      December 31, 2010. However, we intend to use discretion in managing this
      risk as market conditions vary over time, allowing for the possibility of
      adjusting the degree of hedge coverage as we deem appropriate. In any case,
      our
      use of interest rate derivatives will be restricted to use for risk management
      purposes.





**Market
      Risk Disclosures**


**July
      31, 2008**


**(in
      thousands)**





*Instruments
      entered into for hedging purposes -*





*Type of Derivative*
            
            *Notional Size*
            
            *Fixed Price or*
              *Strike Price*
            
            *Underlying Price*
            
            *Termination or*
              *Expiration*
            
            *Fair Value*Interest
                Rate Swaps
            
            $
            6,938
            (1)
            
            5.30
            %
            
            3
                Mo. USD LIBOR
            
            
            12/31/2010
            
            $
            (205
            )Gold
                Forward Sales(2)
            
            
            8,428
                oz./qtr.
            (3)
            $
            500/oz.
            
            
            Price
                of gold
            
            
            9/30/2010
            
            $
            (30
                ,765
            )Gold
                Call Options (2)
            
            
            8,428
                oz./qtr.
            (3)
            $
            535/oz.
            
            
            Price
                of gold
            
            
            9/30/2010
            
            $
            30,039





**(1)******The
                value shown reflects the notional as of July 31, 2008. Over the term
                of
                the swap, the notional amortizes, dropping to approximately
                $656.**(2)******These
                contracts are used for hedging purposes, but hedge accounting is
                not
                applied.******(3)******The
                value shown reflects the current notional, but these contracts amortize
                down to 8,230 ounces per quarter by the contract
                termination.





As
      of
      July 31, 2008, the dollar value of a basis point for this interest rate swap
      was
      slightly less than $900, suggesting that a one-basis point rise (fall) of the
      yield curve would likely foster an increase (decrease) in the interest rate
      swaps value by slightly less than $900. Because hedge accounting is applied,
      the
      contract serves to lock in a fixed rate of interest for the portion of the
      variable rate debt equal to the swap's notional size. The swap covers only
      75
      percent of our variable rate exposure.





The
      combined gold forward sales and long call options serve to synthesize a put
      option that protects us from the market exposure to gold prices below $535
      per
      ounce on the volume of sales consistent with the notional size of these
      contracts. These contracts covered approximately 90 percent of production during
      their term ending July 31, 2008.




39




**Item
              8.**
            **Financial
                Statements and Supplementary
                Data.**





For
      the
      Financial Statements required by Item 8 see the Financial Statements included
      at
      the end of this Form 10-K starting on page F-1.





**Item
              9.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosures.**





There
      have been no changes in or disagreements with accountants with respect to
      accounting and/or financial disclosure.





**Item
                9A.**
              **Controls
                  and Procedures****.**





The
      term
      "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e)
      of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This
      term refers to the controls and procedures of a company that are designed to
      ensure that information required to be disclosed by a company in the reports
      that it files under the Exchange Act is recorded, processed, summarized, and
      reported within the required time periods. Our Chief Executive Officer and
      our
      Chief Financial Officer have evaluated the effectiveness of our disclosure
      controls and procedures as of the end of the period covered by this report.
      They
      have concluded that, as of that date, our disclosure controls and procedures
      were effective at ensuring that required information will be disclosed on a
      timely basis in our reports filed under the Exchange Act.





No
      change
      in our internal control over financial reporting occurred during the period
      covered by this report that has materially affected, or is reasonably likely
      to
      materially affect, our internal control over financial reporting.





Management’s
      Report on Internal Control Over Financial Reporting ****





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as such term is defined in Rules 13a-15(f)
      or
      15d-15(f), under the Exchange Act. Internal control over financial reporting
      is
      a process designed by, or under the supervision of, our principal executive
      and
      principal financial officers and affected by our Board of Directors, management
      and other personnel, and to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external purposes in accordance with generally accepted accounting
      principles. A company’s internal control over financial reporting includes those
      policies and procedures that (i) pertain to the maintenance of records that,
      in
      reasonable detail, accurately and fairly reflect the transactions and
      dispositions of the assets of the company; (ii)provide reasonable assurance
      that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance with generally accepted accounting principles, and
      that
      receipts and expenditures of the company are being made only in accordance
      with
      authorizations of management and directors of the company; and (iii) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use, or disposition of the company’s assets that could have a
      material effect on its financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





Management
      has assessed the effectiveness of our internal control over financial reporting
      as of July 31, 2008. In making this assessment, management used the criteria
      set
      forth in the framework established by the Committee of Sponsoring Organizations
      of the Treadway Commission *Internal
      Control—Integrated Framework* ,
      (COSO).
      Based on this assessment, management has not identified any material weaknesses
      as of July 31, 2008. A material weakness is a control deficiency, or combination
      of control deficiencies, that results in more than a remote likelihood that
      a
      material misstatement of the annual or interim financial statements will not
      be
      prevented or detected.




40




Management
      has concluded that we did maintain effective internal control over financial
      reporting as of July 31, 2008, based on the criteria set forth in “ *Internal
      Control—Integrated Framework”* issued
      by the COSO.





This
      annual report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the SEC that permit us to provide
      only management's report in this annual report.





**Item
              9B.**
            **Other
                Information****.**





None.





**PART
      III**





**Item
              10.**
            **Directors,
                Executive Officers and Corporate
                Governance.**





The
      following table sets forth certain information concerning our directors and
      executive officers:





FirstBecameName
            
            Age
            
            Director
            
            PositionGifford
                A. Dieterle
            
            76
            
            9/82
            
            President,
                Treasurer&
                Chairman of the BoardJohn
                Brownlie
            
            59
            
            2/07
            
            Chief
                Operating Officer, DirectorChristopher
                Chipman
            
            35
            
            
            
            Chief
                Financial OfficerJeffrey
                W. Pritchard
            
            50
            
            1/00
            
            Director,
                Executive Vice President,SecretaryRobert
                Roningen
            
            73
            
            9/93
            
            Director,
                Senior Vice President,Roger
                A. Newell
            
            65
            
            8/00
            
            DirectorJ.
                Scott Hazlitt
            
            56
            
            
            
            Vice
                President – Mine DevelopmentIan
                A. Shaw
            
            68
            
            3/06
            
            DirectorJohn
                Postle
            
            67
            
            3/06
            
            DirectorMark
                T. Nesbitt
            
            63
            
            3/06
            
            Director




41




Directors
      are elected at the meeting of shareholders called for that purpose and hold
      office until the next stockholders meeting called for that purpose or until
      their resignation or death. Officers of the corporation are elected by the
      directors at meetings called by the directors for its purpose.





GIFFORD
      A. DIETERLE, President, Treasurer and Chairman of our Board of Directors. Mr.
      Dieterle was appointed President in September 1997 and has been an officer
      and
      Chairman since 1981. He has a M.S. in Geology obtained from New York University.
      From 1977 until July 1993, he was Chairman, Treasurer, and Executive
      Vice-President of Franklin Consolidated Mining Company. From 1965 to 1987,
      he
      was lecturer in geology at the City University of N.Y. (Hunter Division). Mr.
      Dieterle has been Secretary-Treasurer of South American Minerals Inc. since
      1997
      and a director of that company since 1996.





JOHN
      BROWNLIE, **** Chief
      Operating Officer and a Director, has worked for us since May 2006 and is in
      charge of supervising the construction, start-up and operation of the mine.
      Mr.
      Brownlie provided team management for mining projects requiring technical,
      administrative, political and cultural experience over his 28 year mining
      career. From 2000 to 2006, Mr. Brownlie was a consultant providing mining and
      mineral related services to various companies including SRK, Oxus Mining plc
      and
      Cemco Inc. From 1995 to 2000, he was the General Manager for the
      Zarafshan-Newmont Joint Venture in Uzbekistan, a one-million tonne per month
      heap leach plant which produced over 400,000 ounces of gold per year. From
      1988
      to 1995, Mr. Brownlie served as the Chief Engineer and General Manager for
      Monarch Resources in Venezuela, at both the El Callao Revemin Mill and La
      Camorra gold projects. Before that, was a resident of South Africa and
      associated with numerous mineral projects across Africa. He is also a mechanical
      engineer and fluent in Spanish. Mr. Brownlie is also a director of Palladon
      Ventures, a publicly traded mineral-related company.





CHRISTOPHER
      M. CHIPMAN, Chief Financial Officer. Mr. Chipman has been our Chief Financial
      Officer since March 1, 2006. Since November 2000, Mr. Chipman has been a
      managing member of Chipman & Chipman, LLC, a consulting firm that assists
      public companies with the preparation of periodic reports required to be filed
      with the Securities and Exchange Commission and compliance with Section 404
      of
      the Sarbanes Oxley Act of 2002. The firm also provides outsourced financial
      resources to clients assisting in financial reporting, forecasting and
      accounting services. Mr. Chipman is a CPA and, from 1996 to 1998, he was a
      senior accountant with the accounting firm of Grant Thornton LLP. Mr. Chipman
      was the Controller of Frontline Solutions, Inc., a software company (March
      2000
      to November 2000); a Senior Financial Analyst for GlaxoSmithKline (1998-2000);
      and an Audit Examiner for Wachovia Corporation (1994-1996). He received a B.A.
      in Economics from Ursinus College in 1994. He is a member of the American and
      Pennsylvania Institute of Certified Public Accountants.





JEFFREY
      W. PRITCHARD, Executive Vice President, Secretary and Director, has worked
      for
      us since 1996. He has been in the marketing/public relations field since
      receiving a Bachelor’s degree from the State University of New York in 1979. Mr.
      Pritchard has served as the Director of Marketing for the New Jersey Devils
      (1987-1990) and as the Director of Sales for the New York Islanders (1985-1987).
      He also was an Executive Vice President with Long Island based Performance
      Network, a marketing and publishing concern from 1990 through 1995.





J.
      SCOTT
      HAZLITT, Vice President - Mine Development, has been in the mining business
      since 1974. Since 2001, he has focused on development of our El Chanate
      concessions. Currently, he is involved in mine expansion plans and corporate
      development.  He has worked primarily in reserves, feasibility, development
      and mine operations. Mr. Hazlitt was a field geologist for ARCO Syncrude
      Division at their CB oil Shale project in 1974 and 1975. He was a contract
      geologist for Pioneer Uravan and others from 1975 to 1977. He was a mine
      geologist for Cotter Corporation in 1978 and 1979, and was a mine geologist
      for
      ASARCO from 1979 to 1984. He served as Vice President of Exploration for Mallon
      Minerals from 1984 to 1988. From 1988 to 1992, Mr. Hazlitt was a project
      geologist and Mine Superintendent for the Lincoln development project. From
      1992
      to 1995, he was self-employed as a consulting mining geologist in California
      and
      Nevada. He was Mine Operations Chief Geologist for Getchell Gold from 1995
      to
      1999. His work experience has included precious metals, base metals, uranium,
      and oil shale. Mr. Hazlitt served as mine manager at our Hopemore Mine in
      Leadville, Colorado starting in November 1999. His highest educational degree
      is
      Master of Science from Colorado State University. He is a registered geologist
      in the state of California.




42




ROBERT
      RONINGEN, Senior Vice President and Director, has been engaged in the practice
      of law as a sole practitioner and is a self-employed consultant geophysicist
      in
      Duluth, Minnesota. Mr. Roningen served as our Secretary until February 2007.
      From 1988 to August 1993, he was an officer and director of Franklin
      Consolidated Mining Company, Inc. He graduated from the University of Minnesota
      in 1957 with a B.A. in geology and in 1962 with a degree in Law.





ROGER
      A.
      NEWELL, Director, worked for us from 2000 to September 2007. He was our Vice
      President – Development until September 2007. Since October 2007, Mr.
      Newell has been an Executive Vice President of Kilimanjaro Mining Company Ltd.,
      a private Nevada based company involved in uranium and gold exploration in
      Tanzania, Africa. Since
      June 2008, he has served as the Chairman, CEO and President of Lake Victoria
      Mining Company, a U.S. Public Company with exploration property in Tanzania,
      Africa. From 1974 through 1977, he was a geologist with Kennecott Copper
      Corporation. From 1977 through 1989, he served as Exploration Manager/Senior
      Geologist for the Newmont Mining Corporation and, from 1989 through 1995, was
      the Exploration Manager for Gold Fields Mining Company. He was Vice President
      Development, for Western Exploration Company from 1997 through 2000. Since
      1995,
      he has been a senior consultant in the Minerals Advisory Group LLC, Tucson,
      Arizona, a company that provides technical and engineering advice to clients
      regarding mineral projects. He has been self-employed as a geologist since
      2001.
      He is a Fellow in the Society of Economic Geologists and a Past President of
      that Society’s Foundation. . He has a M.Sc. from the Colorado School of Mines
      and a Ph.D. in mining and mineral exploration from Stanford
      University.





IAN
      A.
      SHAW is a member of our Board of Directors and the Board’s Audit and
      Compensation Committees.  Mr. Shaw has over 33 years of experience in the
      mining industry. He has been Managing Director of Shaw & Associates since
      1993.  Shaw & Associates is a corporate services consulting firm
      specializing in corporate finance, regulatory reporting and compliance with
      clients that are typically public companies in the resource industry. In the
      course of providing consulting services he has accepted positions as an officer
      or director with number of his clients. He recently held the position of
      Director, since 1994, of Metallica Resources Inc., a TSX listed corporation
      with
      a gold mine in Mexico, and exploration properties in Chile and Alaska. Positions
      he currently holds include Director of Pelangio Exploration, Inc., since 2008,
      a
      TSX listed corporation with an interest in gold exploration properties in Canada
      and Ghana; Director of PDX Resources, Inc. (formerly Pelangio Mines, Inc.),
      since 2008, a TSX listed company with an investment in a company which holds
      a
      gold property in Canada; Vice President, Finance and CFO, since May 2005, of
      Unor Inc., a TSX listed company with uranium exploration properties in
      Canada; and Chief Financial Officer, since January 2007, of Olivut Resources
      Ltd., a TSX listed corporation with diamond exploration properties in Canada.
      Mr. Shaw is a Chartered Accountant and received a B. Comm. from Trinity College
      at the University of Toronto in 1964.





JOHN
      POSTLE is a member of our Board of Directors and the Board’s Audit and
      Compensation Committees.  He is a Consulting Mining Engineer associated
      with Scott Wilson Roscoe Postle Associates Inc. In 1985 he was a founding
      partner of Roscoe Postle Associates Inc. which later merged with Scott Wilson
      Group Plc.  Mr. Postle provides mining consulting services to a number of
      international financial institutions, corporations, utilities and law
      firms.  He worked for Cominco Ltd (1965-1970), Falconbridge Ltd (1970-1975)
      and D.S. Robertson and Associates (1976-1985) and has worked at a number of
      open
      pit and underground mining operations in both operating and planning
      capacities.  Mr. Postle is a Past Chairman of the Mineral Economics
      Committee of the Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”),
      and was appointed a Distinguished Lecturer of the CIM in 1991.  In 1997, he
      was awarded the CIM Robert Elver Mineral Economics Award.  He is currently
      Chairman of a CIM Standing Committee on Ore Reserve Definitions. Mr. Postle
      is a
      director of Strait Gold Corporation, a Canadian publicly traded company, and
      serves as a member of that company’s audit and disclosure committees.  Mr.
      Postle has a B.A.Sc. Degree in Mining Engineering from the University of British
      Columbia in 1965 and a M.Sc. Degree in Earth Sciences from Stanford University
      in 1968. ”




43




MARK
      T.
      NESBITT is a member of our Board of Directors and the Board’s Audit and
      Compensation Committees. Since 1988, he has been a natural resources attorney
      in
      Denver, Colorado specializing in domestic and international mining transactions,
      agreements, negotiations, title due diligence, corporate and general business
      counsel. Mr. Nesbitt has been an Adjunct Professor at the University of Denver
      School of Law's since 2001, is an active member of the Rocky Mountain Mineral
      Law Foundation, having served as a Trustee from 1987 to 1993, and from 2003
      to
      2006, Co-chairman of the Mining Sessions at the Foundation’s international
      natural resource institute in Buenos Aires, Argentina in 2007, Co-chairman
      of
      the Foundation's Mining Law and Investment in Latin America institute in Lima,
      Peru in 2003, and Chairman of the same institute in 2003, and Chairman of the
      Foundation's first Land and Permitting Special Institute in 1994. He also has
      served continuously over the years on the Foundation's Special Institutes
      Committee, Long Range Planning Committee, and numerous other committees. Mr.
      Nesbitt is a member of the International, American, Colorado and Denver Bar
      Associations, Rocky Mountain Mineral Law Foundation, International Mining
      Professionals Society (Treasurer since 2000), and the Colorado Mining
      Association. He is also a former Director of the Colorado Mining Association
      and
      past President of the Rocky Mountain Association of Mineral Landmen. He received
      a B.S. degree in Geology from Washington State University in 1968 and a J.D.
      from Gonzaga University School of Law in 1975.





Jack
      V.
      Everett, resigned as our Vice President of Exploration and a member of our
      Board
      of Directors on June 6, 2007. On September 10, 2007, Roger A. Newell resigned
      as
      our Vice President of Development. He continues to serve as a member of our
      Board of Directors.





Compliance
      with Section 16(a) of The Securities Exchange Act of 1934





To
      our
      knowledge, during the fiscal year ended July 31, 2008, based solely on a review
      of such materials as are required by the Securities and Exchange Commission,
      no
      officer, director or beneficial holder of more than ten percent of our issued
      and outstanding shares of Common Stock failed to timely file with the Securities
      and Exchange Commission any form or report required to be so filed pursuant
      to
      Section 16(a) of the Securities Exchange Act of 1934, except that Mr. Roningen
      filed forms 4 late with regard to six transactions, Mr. Brownlie filed forms
      4
      late with regard to two transactions and Messrs. Dieterle, Pritchard, Chipman,
      Hazlitt, Shaw, Postle and Nesbit each filed a form 4 late with regard to one
      transaction.





Meetings
      And Committees Of The Board





Our
      Board
      of Directors is responsible for the management and direction of our company
      and
      for establishing broad corporate policies. A
      primary responsibility of the Board is to provide effective governance over our
      affairs for the benefit of our stockholders. In all actions taken by the Board,
      the Directors are expected to exercise their business judgment in what they
      reasonably believe to be the best interests of our company. In discharging
      that
      obligation, Directors may rely on the honesty and integrity of our senior
      executives and our outside advisors and auditors.




44




The
      Board
      of Directors and the Audit Committee of the Board meet periodically throughout
      the year to receive and discuss operating and financial reports presented by
      our
      executive officers as reports by experts and other advisors. The Board held
      five
      meetings during the fiscal year ended July 31, 2008 in person and
      telephonically, and acted by unanimous written consent on three occasions.
      All
      directors attended 90% or more of the aggregate meetings.




In
      fiscal
      2008, the Audit Committee, consisting of all of the non-employee members of
      the
      Board of Directors, met on four occasions. Representatives of our auditor were
      in attendance at one meeting without management present.





Our
      Board
      of Directors has no standing nominating committee because this function is
      handled by the Board of Directors. Nominees to the Board of Directors are
      selected by the Board of Directors based on current business and industry
      knowledge as well as general business knowledge.





**Audit
      Committee and Audit Committee Expert** .





The
      Audit
      Committee of our Board of Directors consists of Ian A. Shaw, Committee Chairman,
      John Postle and Mark T. Nesbitt. The Board of Directors has determined that
      all
      three members are independent directors as (i) defined in Rule 10A-3(b)(1)(ii) under the
      Securities Exchange Act of 1934 (the “Exchange Act”) and (ii) under Section
      121B(2)(a) of the AMEX Company Guide (although our securities are not listed
      on
      the American Stock Exchange or any other national exchange). The
      Audit
      Committee met four times telephonically in fiscal 2008. All committee members
      were present at the meetings.





Mr.
      Shaw serves
      as the financial expert as defined in Securities and Exchange Commission rules
      on the committee. We believe Messrs. Shaw, Postle and Nesbitt to be independent
      of management and free of any relationship that would interfere with their
      exercise of independent judgment as members of this committee. The principal
      functions of the Audit Committee are to (i) assist the Board in fulfilling
      its
      oversight responsibility relating to the annual independent audit of our
      consolidated financial statements, the engagement of the independent registered
      public accounting firm and the evaluation of the independent registered public
      accounting firm’s qualifications, independence and performance (ii) prepare the
      reports or statements as may be required by the securities laws, (iii) assist
      the Board in fulfilling its oversight responsibility relating to the integrity
      of our financial statements and financial reporting process and our system
      of
      internal accounting and financial controls, (iv) discuss the financial
      statements and reports with management, including any significant adjustments,
      management judgments and estimates, new accounting policies and disagreements
      with management, and (vi) review disclosures by independent accountants
      concerning relationships with us and the performance of our independent
      accountants.





**Compensation
      Committee.**





Our
      Compensation Committee consists of Messrs. Shaw, Postle and Nesbitt, our
      independent directors. The principal functions of the Compensation Committee
      are
      to advise and makes recommendations to our Board of Directors regarding matters
      relating to the compensation of directors, officers and senior management.
      The
      Compensation Committee met three times telephonically in fiscal 2008. All
      committee members were present at the meetings.




45




**Communication
      with the Board of Directors**





Interested
      parties wishing to contact our Board of Directors may do so by writing to the
      following address: Board of Directors, 76
      Beaver
      Street, 14th Floor, New York, NY 10005, Attn: Jeffrey W. Pritchard,
      Secretary .
      All
      letters received will be categorized and processed by Mr. Pritchard and then
      forwarded to our Board of Directors.





**Code
      of Ethics**





We
      adopted a Code of Ethics that applies to our officers, directors and employees,
      including our principal executive officer, principal financial officer and
      principal accounting officer. The
      Code
      of Ethics is publicly available in the Management section on our Website at
      www.capitalgoldcorp.com. If we make any substantive amendments to this code
      of
      ethics or grant any waiver, including any implicit waiver, from a provision
      of
      the code to our chief executive officer, principal financial officer or
      principal accounting officer, we will disclose the nature of such amendment
      or
      waiver on that Website or in a report on Form 8-K.





**Item
              11.**
            **Executive
                Compensation**





**Compensation
      Discussion and Analysis**





**Objectives
      and Philosophy of Executive Compensation**





The
      primary objectives of the Compensation Committee with respect to executive
      compensation are to attract and retain the most talented and dedicated
      executives possible, to tie annual and long-term cash and stock incentives
      to
      achievement of measurable performance objectives, and to align executives'
      incentives with stockholder value creation. To achieve these objectives, the
      compensation committee expects to implement and maintain compensation plans
      that
      tie a substantial portion of executives' overall compensation to the experience
      level of the executive or employee, the complexity and amount of responsibility
      of the employee’s job, key strategic financial and operational goals such as the
      establishment and maintenance of key strategic relationships, the development
      and operation of our mining projects, the identification and possible
      development of additional mining properties and the performance of our common
      stock price. The compensation committee evaluates individual executive
      performance with the goal of setting compensation at levels the compensation
      committee believes are comparable with executives in other companies of similar
      size and stage of development operating in the mining industry while taking
      into
      account our relative performance and our own strategic goals. It is our general
      practice to grant equity-based awards to executives and employees.





Our
      compensation plan was developed by utilizing an independent compensation and
      benefits consultant who utilizes publicly available compensation data for
      national and regional companies in the mining industry. We believe that the
      practices of this group of companies will provide us with appropriate
      compensation benchmarks, because these companies have similar organizational
      structures and tend to compete with us for executives and other employees.
      For
      benchmarking executive compensation, we typically will review the compensation
      data provided by these independent consultants and provide recommendations
      to
      the board of directors.





**Elements
      of Executive Compensation**





Executive
      compensation consists of the following elements:




46




Regular
      Compensation





Regular
      compensation for our executives will be established based on the scope of their
      responsibilities, taking into account competitive market compensation paid
      by
      other companies for similar positions. Generally, we believe that executive
      base
      salaries should be targeted near the median of the range of salaries for
      executives in similar positions with similar responsibilities at comparable
      companies, in line with our compensation philosophy. Regular compensation will
      be reviewed annually, and adjusted from time to time to realign salaries with
      market levels after taking into account individual responsibilities, performance
      and experience. This review will occur in the fourth fiscal quarter of each
      year.


Compensation
      to new executives is based entirely upon similar factors to those discussed
      above for regular employees and executives and timing is determined solely
      by
      needs of our company, some of which can be completely unforeseen, such as
      resignations or terminations for cause.





Post-termination
      compensation is fixed in the employment agreement of each executive, and
      generally, post-termination payments are not offered to non-executive
      employees.





Annual
      Bonus





Our
      compensation program includes eligibility for an annual performance-based cash
      and/or equity- based bonus (See “2006 Equity Incentive Plan” below) in the case
      of all executives and certain non-executive employees. The amount of the cash
      and/or equity-based bonus will depend on the level of achievement of the
      financial and operational goals and for achieving individual annual performance
      objectives. These objectives will vary depending on the individual executive,
      but will relate generally to strategic factors such as establishment and
      maintenance of key strategic relationships, the development and operation of
      our
      mining projects, the identification and possible development of additional
      mining properties, and to financial factors such as raising capital and
      improving our results of operations. Bonuses, if awarded, will generally be
      determined at the sole discretion of the Board of Directors as recommended
      by
      the compensation committee.





All
      employees, whether executives or key employees, as well as administrative staff,
      will be granted bonus compensation at the same time. All efforts are made by
      senior management, the compensation committee and the Board of Directors to
      avoid issuances of stock as compensation that would create even the appearance
      of being timed to the release of material non-public information.





2006
      Equity Incentive Plan





The
      2006
      Equity Incentive Plan (the “Plan”) is intended to attract and retain individuals
      of experience and ability, to provide incentive to our employees, consultants,
      and non-employee directors, to encourage employee and director proprietary
      interests in us, and to encourage employees to remain in our employ.





The
      Plan
      authorizes the grant of non-qualified and incentive stock options, stock
      appreciation rights and restricted stock awards (each, an “Award”). A maximum of
      10,000,000 shares of common stock are reserved for potential issuance pursuant
      to Awards under the Plan. Unless sooner terminated, the Plan will continue
      in
      effect for a period of 10 years from its effective date.





The
      Plan
      is administered by our Board of Directors which has delegated the administration
      to our Compensation Committee. The Plan provides for Awards to be made to such
      of our employees, directors and consultants and our affiliates as the Board
      may
      select.





Stock
      options awarded under the Plan may vest and be exercisable at such times (not
      later than 10 years after the date of grant) and at such exercise prices (not
      less than Fair Market Value at the date of grant) as the Board may determine.
      Unless otherwise determined by the Board, stock options shall not be
      transferable except by will or by the laws of descent and distribution. The
      Board may provide for options to become immediately exercisable upon a "change
      in control," as defined in the Plan.




47




The
      exercise price of an option must be paid in cash. No options may be granted
      under the Plan after the tenth anniversary of its effective date. Unless the
      Board determines otherwise, there are certain continuous service requirements
      and the options are not transferable.





The
      Plan
      provides the Board with the general power to amend the Plan, or any portion
      thereof at any time in any respect without the approval of our stockholders,
      provided however, that the stockholders must approve any amendment which
      increases the fixed maximum percentage of shares of common stock issuable
      pursuant to the Plan, reduces the exercise price of an Award held by a director,
      officer or ten percent stockholder or extends the term of an Award held by
      a
      director, officer or ten percent stockholder. Notwithstanding the foregoing,
      stockholder approval may still be necessary to satisfy the requirements of
      Section 422 of the Code, Rule 16b-3 of the Exchange Act or any applicable stock
      exchange listing requirements. The Board may amend the Plan in any respect
      it
      deems necessary or advisable to provide eligible Employees with the maximum
      benefits provided or to be provided under the provisions of the Code and the
      regulations promulgated thereunder relating to Incentive Stock Options and/or
      to
      bring the Plan and/or Incentive Stock Options granted under it into compliance
      therewith. Rights under any Award granted before amendment of the Plan cannot
      be
      impaired by any amendment of the Plan unless the Participant consents in
      writing. The Board is empowered to amend the terms of any one or more Awards;
      provided, however, that the rights under any Award shall not be impaired by
      any
      such amendment unless the applicable Participant consents in writing and further
      provided that the Board cannot amend the exercise price of an option, the Fair
      Market Value of an Award or extend the term of an option or Award without
      obtaining the approval of the stockholders if required by the rules of the
      TSX
      or any stock exchange upon which the common stock is listed.





Although
      non-cash compensation is utilized by us to prevent placing strains on liquidity,
      care is taken by management to avoid materially diluting investors.





**Employment
      and Engagement Agreements**





We
      entered into employment agreements, effective July 31, 2006, with the following
      executive officers: Gifford A. Dieterle, President and Treasurer, Roger A.
      Newell, Vice President of Development, Jack V. Everett, Vice President of
      Exploration, and Jeffrey W. Pritchard, Vice President of Investor Relations.
      On
      December 5, 2006, effective January 1, 2007, we entered into an employment
      agreement with J. Scott Hazlitt, Vice President of Mine
      Development.





On
      June
      6, 2007, Jack V. Everett resigned as Vice President of Exploration and a
      Director of our company and entered into a consulting agreement with us to
      provide mining and mineral exploration consultation services.





On
      September 10, 2007, Roger A. Newell resigned as Vice President of Development.
      He will continue to serve as a member of our Board of Directors.





The
      agreements run for a period of three years and automatically renew for
      successive one-year periods unless we or the executive provides the other party
      with written notice of their intent not to renew at least 30 days prior to
      the
      expiration of the then current employment period.




48




Mr.
      Dieterle is entitled to a base annual salary of at least $180,000, Mr. Hazlitt
      is entitled to a base annual salary of at least $125,000 and each of the other
      executives is entitled to a base annual salary of at least $120,000. Each
      executive is entitled to a bonus or salary increase in the sole discretion
      of
      the board of directors. In addition, Messrs. Dieterle, Newell, Everett and
      Pritchard each received two year options to purchase an aggregate of 250,000
      shares of our common stock at an exercise price of $0.32 per share (the closing
      price on July 31, 2006). These options have all been exercised. As discussed
      below, these agreements have been amended to provide for salary
      increases.





We
      have
      the right to terminate any executive’s employment for cause or on 30 days’ prior
      written notice without cause or in the event of the executive’s disability (as
      defined in the agreements). The agreements automatically terminate upon an
      executive’s death. “Cause” is defined in the agreements as (1) a failure or
      refusal to perform the services required under the agreement; (2) a material
      breach by executive of any of the terms of the agreement; or (3) executive’s
      conviction of a crime that either results in imprisonment or involves
      embezzlement, dishonesty, or activities injurious to our reputation. In the
      event that we terminate an executive’s employment without cause or due to the
      disability of the executive, the executive will be entitled to a lump sum
      severance payment equal to one month’s salary, in the case of termination for
      disability, and up to 12 month’s salary (depending upon years of service), in
      the case of termination without cause.





Each
      executive has the right to terminate his employment agreement on 60 days’ prior
      written notice or, in the event of a material breach by us of any of the terms
      of the agreement, upon 30 days’ prior written notice. In the event of a claim of
      material breach by us of the agreement, the executive must specify the breach
      and its failure to either (i) cure or diligently commence to cure the breach
      within the 30 day notice period, or (ii) dispute in good faith the existence
      of
      the material breach. In the event that an agreement terminates due to our
      breach, the executive is entitled to severance payments in equal monthly
      installments beginning in the month following the executive’s termination equal
      to three month’ salary plus one additional month’s salary for each year of
      service to us. Severance payments cannot exceed 12 month’s salary.





In
      conjunction with the employment agreements, our Board of Directors deeming
      it
      essential to the best interests of its stockholders to foster the continuous
      engagement of key management personnel and recognizing that, as is the case
      with
      many publicly held corporations, a change of control might occur and that such
      possibility, and the uncertainty and questions which it might raise among
      management, might result in the departure or distraction of management personnel
      to the detriment of the company and its stockholders, determined to reinforce
      and encourage the continued attention and dedication of members of our
      management to their engagement without distraction in the face of potentially
      disturbing circumstances arising from the possibility of a change in control
      of
      the company, it entered into identical agreements regarding change in control
      with the executives. Each of the agreements regarding change in control
      continues through December 31, 2009 (December 31, 2010 for Mr. Hazlitt) and
      extends automatically to the third anniversary thereof unless we give notice
      to
      the executive prior to the date of such extension that the agreement term will
      not be extended. Notwithstanding the foregoing, if a change in control occurs
      during the term of the agreements, the term of the agreements will continue
      through the second anniversary of the date on which the change in control
      occurred. Each of the agreements entitles the executive to change of control
      benefits, as defined in the agreements and summarized below, upon his
      termination of employment with us during a potential change in control, as
      defined in the agreements, or after a change in control, as defined in the
      agreements, when his termination is caused (1) by us for any reason other than
      permanent disability or cause, as defined in the agreement (2) by the executive
      for good reason as defined in the agreements or, (3) by the executive for any
      reason during the 30 day period commencing on the first date which is six months
      after the date of the change in control. Each executive would receive a lump
      sum
      cash payment of three times his base salary and three times his bonus award
      for
      the prior year, as well as outplacement benefits. In addition, the exercise
      price of all options would decrease to $0.01 per share. Each agreement also
      provides that the executive is entitled to a payment to make him whole for
      any
      federal excise tax imposed on change of control or severance payments received
      by him.




49




On
      September 14, 2007, we entered into a Second Amended Engagement Agreement (the
      “Agreement”) with Christopher Chipman, our Chief Financial Officer, effective
      May 1, 2007. The Agreement supersedes and replaces Mr. Chipman’s prior agreement
      that expired on August 31, 2007. He receives a monthly fee of $14,583. The
      Agreement expires on August 31, 2009 and automatically renews for successive
      one-year periods, unless either party gives at least 30 days prior notice to
      the
      other party of its intent not to renew. Mr. Chipman can terminate the Agreement
      on 60 days prior notice. We can terminate the Agreement without cause on 30
      days
      prior notice and for cause (as defined in the Agreement). The Agreement also
      terminates upon Mr. Chipman’s disability (as defined in the Agreement) or death.
      In the event that we terminate the Agreement without cause, Mr. Chipman will
      be
      entitled to a cash termination payment equal to his Annual Fee in effect upon
      the date of termination, payable in equal monthly installments beginning in
      the
      month following his termination. In the event the Agreement is terminated by
      Mr.
      Chipman at his election or due to his death or disability, Mr. Chipman will
      be
      entitled to the fees otherwise due and payable to him through the last day
      of
      the month in which such termination occurs. In conjunction with Agreement,
      we
      entered into a change of control agreement similar to the agreements entered
      into with our other executive officers. In connection with the original
      engagement agreement with Mr. Chipman in March 2006, Mr. Chipman received a
      two
      year option to purchase an aggregate of 50,000 shares of our common stock at
      an
      exercise price of $.34 per share. This option has been exercised in
      full.





On
      May
      12, 2006, we entered into an employment agreement with John Brownlie, pursuant
      to which Mr. Brownlie originally served as Vice President Operations. Mr.
      Brownlie became our Chief Operating Officer in February 2007. Mr. Brownlie
      serves as Vice President Operations. Mr. Brownlie receives a base annual salary
      of $150,000 and is entitled to annual bonuses. Upon his employment, he received
      options to purchase an aggregate of 200,000 shares of our common stock at an
      exercise price of $.32 per share. 50,000 options vested immediately and the
      balance vest upon our achieving "Economic Completion" as that term is defined
      in
      the Standard Bank Credit Facility (when we have commenced mining operations
      and
      has been operating at anticipated capacity for 60 to 90 days). The term of
      the
      options is two years from the date of vesting. The agreement runs for an initial
      two year period, and automatically renews thereafter for additional one year
      periods unless terminated by either party within 30 days of a renewal date.
      We
      can terminate the agreement for cause or upon 30 days notice without cause.
      Mr.
      Brownlie can terminate the agreement upon 60 days notice without cause or,
      if
      there is a breach of the agreement by us that is not timely cured, upon 30
      days
      notice. In the event that we terminates him without cause or he terminates
      due
      to our breach, he will be entitled to certain severance payments. We utilized
      the Black-Scholes method to fair value the 200,000 options received by Mr.
      Brownlie. We recorded approximately $70,000 as deferred compensation expense
      as
      of the date of the agreement and recorded the vested portion or $17,500 as
      stock
      based compensation expense for the year ended July 31, 2006.





On
      August
      29, 2007, at the recommendation of the compensation committee, the Board
      increased the salaries of our executive officers to be commensurate with
      industry standards and amended their respective agreements accordingly. The
      new
      salaries were as follows: Gifford A. Dieterle, President, Treasurer and
      Chairman of the Board, $250,000; John Brownlie, Chief Operating Officer,
      $225,000; Christopher Chipman, Chief Financial Officer, $175,000 (consulting
      fee); Jeffrey W. Pritchard, Vice President - Investor Relations and Secretary,
      $195,000; Roger A. Newell, Vice President - Development, $135,000; and J. Scott
      Hazlitt, Vice President - Mine Development, $135,000. The salary increase for
      Mr. Brownlie and the consulting fee increase for Mr. Chipman were retroactive
      to
      May 1, 2007 and the salary increase for Mr. Pritchard is retroactive to August
      1, 2007.




50




On
      July
      17, 2008, at the recommendation of the compensation committee of our Board
      of
      Directors, our executive officers were awarded salary increases effective August
      1, 2008. The new salaries were as follows: Gifford A. Dieterle, President,
      Treasurer and Chairman of the Board, $287,500; John Brownlie, Chief Operating
      Officer, $258,750; Christopher Chipman, Chief Financial Officer, $201,250
      (consulting fee); Jeffrey W. Pritchard, Vice President - Investor Relations
      and
      Secretary, $224,250; and J. Scott Hazlitt, Vice President - Mine Development,
      $155,250.





On
      October 28, 2008, we entered into an Engagement Agreement with John Brownlie,
      our Chief Operating Officer. The agreement supersedes a May 12, 2006 employment
      agreement between us and Mr. Brownlie. Pursuant to the Engagement Agreement,
      Mr.
      Brownlie serves as our Chief Operating Officer and receives a base annual fee
      of
      at least $258,750 and is entitled to annual bonuses. The Engagement Agreement
      runs through August 31, 2009, and automatically renews thereafter for additional
      one year periods unless terminated by either party within 30 days of a renewal
      date. We can terminate the agreement for cause or upon 30 days notice without
      cause. Mr. Brownlie can terminate the agreement upon 60 days notice without
      cause or, if there is a breach of the agreement by us that is not timely cured,
      upon 30 days notice. In the event that we terminate him without cause or he
      terminates due to our breach, he will be entitled to certain severance payments.
      We previously entered  into a change of control agreement with Mr. Brownlie
      similar to the agreements entered into with our other executive officers.





**Compensation
      of Directors**





During
      the fiscal year ended July 31, 2007, our Independent Directors each received
      a
      fee of $1,000 per month. Robert Roningen, director, received a fee of $2,000
      per
      month for legal and consulting services during the fiscal year ended July 31,
      2007. Non-independent directors were not otherwise compensated for acting in
      their capacity as Directors. Directors are reimbursed for their accountable
      expenses incurred in attending meetings and conducting their duties. On August
      29, 2007, we increased directors’ compensation to our independent directors and
      to Robert Roningen and Roger Newell by $1,000 per month.





**Conclusion**





Our
      compensation policies are designed to retain and motivate our senior executive
      officers and to ultimately reward them for outstanding individual and corporate
      performance.




**Summary
      Compensation Table**




The
      following tables set forth the total compensation paid to or earned by our
      named
      executive officers, as that term is defined in Item 402(a)(3) of Regulation
      S-K
      as of our fiscal years ended July 31, 2008 and 2007, respectively (000’s):




51




**Name & Principal Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Stock**
              **Awards**
              (2)
            
            **Option**
              **Awards**
              (1)
            
            **Non-Equity**
              **Incentive**
              **Plan**
              **Compen- sation**
            
            **Non-**
              **qualified**
              **Deferred**
              **Compen-**
              **sation**
              **Earnings**
            
            **All Other**
              **Compen-**
              **sation ($)**
            
            **Total**
              **($)**Gifford A. Dieterle,
              Director, Chairman,
              Treasurer and CEO
            
            
            2008
            
            $
            244
            
            $
            325
            
            $
            102
            
            $
            60
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            731John
                Brownlie,
              Director
                and COO
            
            
            2008
            
            $
            275
            
            $
            318
            
            $
            102
            
            $
            112
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            816Jeffrey
                Pritchard,
              Executive
                Vice President
            
            
            2008
            
            $
            189
            
            $
            284
            
            $
            102
            
            $
            60
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            634





**Notes:**(1)
            Based
                on Black Scholes Pricing Model of valuing options.(2)
            Issuance
                of shares based on the fair market value of the our common stock
                on the
                date of grant.




**Name & Principal Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Stock**
              **Awards**
              (2)
            
            **Option**
              **Awards**
              (1)
            
            **Non-Equity**
              **Incentive**
              **Plan**
              **Compen-**
              **sation**
            
            **Non-**
              **qualified**
              **Deferred**
              **Compen-**
              **sation**
              **Earnings**
            
            **All Other**
              **Compen-**
              **sation**
              **($)**
            
            **Total**
              **($)**Gifford A. Dieterle,
              Director, Chairman,
              Treasurer and CEO
            
            
            2007
            
            $
            180
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            180John
                Brownlie,
              Director
                and COO
            
            
            2007
            
            $
            150
            
            $
            -
            
            $
            225
            
            $
            34
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            409Christopher
                M. Chipman,
              CFO
            
            
            2007
            
            $
            118
            
            $
            -
            
            $
            -
            
            $
            79
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            197





**Notes:**(1)
            Based
                on Black Scholes Pricing Model of valuing options. Total fair value
                of
                option awards granted in 2007 was $113,000.(2)
            Issuance
                of shares based on the fair market value of our common stock on the
                date
                of grant.




52




**Outstanding
      Equity Awards At Fiscal Year-End** **(000’s
      except share data)**




The
      following tables provide information concerning unexercised options for each
      of
      our named executive officers, as that term is defined in Item 402(a)(3) of
      Regulation S-K as of our fiscal year ended July 31, 2008:




**2008
      Table**




**Name and Principal Position**
            
            **Number of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options (#)**
              **Exercisable**
            
            **Number of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options (#)**
              **Unexercisable**
            
            **Equity Incentive**
              **Plan Awards:**
              **Number of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Unearned Options**
            
            **Option**
              **Exercise**
              **Price**
            
            **Option**
              **Expiration**
              **Date**Gifford A. Dieterle, Director, Chairman, Treasurer and
                CEO
            
            
            150,000
            
            
            350,000
            
            
            350,000
            
            $
            0.63
            
            
            12/20/14John
                Brownlie, Director and COO
            
            
            150,000
            
            
            350,000
            
            
            350,000
            
            $
            0.63
            
            
            12/20/14Jeffrey
                Pritchard, Executive Vice President
            
            
            150,000
            
            
            350,000
            
            
            350,000
            
            $
            0.63
            
            
            12/20/14




**Option
      Exercises and Stock Vested**




**Option Awards**
            
            **Stock Awards****Name**
              **(a)**
            
            **Number of Shares**
              **Acquired on Exercise**
              **(#)**
              **(b)**
            
            **Value Realized on**
              **Exercise ($)**
              **(c)**
            
            **Number of Shares**
              **Acquired on Vesting (#)**
              **(d)**
            
            **Value of Realized on**
              **Vesting ($)**
              **(e)**Gifford A. Dieterle, Director, Chairman, Treasurer and
                CEO
            
            
            250,000
            
            $
            83
            
            
            151,142
            
            $
            103John
                Brownlie, Director and COO
            
            
            200,000
            
            $
            72
            
            
            151,142
            
            $
            103Jeffrey
                Pritchard, Executive Vice President
            
            
            250,000
            
            $
            88
            
            
            151,142
            
            $
            103




Please
      also see *“Part
      III, Item 13. Certain Relationships and Related Transactions”* below.





**Compensation
      Committee Interlocks and Insider Participation**





Our
      Compensation Committee of the Board of Directors, consisting of Ian Shaw, the
      Committee Chairman, John Postle and Mark T. Nesbitt, are all independent
      directors. There are no interlocking relationships.





**COMPENSATION
      COMMITTEE REPORT**





Our
      Committee has reviewed and discussed the Compensation Discussion and Analysis
      contained in this Annual Report with management. Based on our Committee’s review
      of and the discussions with management with respect to the Compensation
      Discussion and Analysis, our Committee recommended to the board of directors
      that the Compensation Discussion and Analysis be included in the our Annual
      Report on Form 10-K for the fiscal year ended July 31, 2008 for filing with
      the
      SEC.




53




COMPENSATION
                COMMITTEEIan
                Shaw, Committee ChairmanJohn
                PostleMark
                T. Nesbitt




The
      foregoing Compensation Committee report shall not be deemed incorporated by
      reference into any filing under the Securities Act of 1933 or the Securities
      Exchange Act of 1934, and shall not otherwise be deemed filed under
      these


54




**Director
      Compensation**




The
      following tables sets forth the compensation paid to our directors for the
      fiscal year ended July 31, 2008 (000’s).




**2008
      Table**




**Name**
            
            **Fees**
              **Earned or**
              **Paid in**
              **Cash**
              **($)**
            
            **Stock**
              **Awards**
              **($)**
            
            **Option**
              **Awards**
              **($)** (1)
            
            **Non-Equity**
              **Incentive Plan**
              **Compensation**
              **(****$)**
            
            **Nonqualified**
              **Deferred**
              **Compensation**
              **Earnings**
              **($)**
            
            **All Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**Ian A. Shaw, Director
            
            $
            24
            
            $
            11
            
            $
            3
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            38John
                Postle, Director
            
            $
            24
            
            $
            11
            
            $
            3
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            38Mark
                T. Nesbitt, Director
            
            $
            24
            
            $
            11
            
            $
            3
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            38Roger
                Newell, Direcotr
            
            $
            12
            
            $
            7
            
            $
            2
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            21Robert
                Roningen, Director
            
            $
            12
            
            $
            7
            
            $
            2
            
            $
            -
            
            $
            -
            
            $
            24
            
            $
            45


(1)
      Based
      on Black Scholes Pricing Model of valuing options.





**Item
              12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters****.**





The
      following table sets forth as of October 24 ,
      2008 ,
      the
      number and percentage of outstanding shares of Common Stock beneficially owned
      by:





·
            Each
                person, individually or as a group, known to us to be deemed the
                beneficial owners of five percent or more of our issued and outstanding
                Common Stock;


·
            Each
                of our Directors and the Named Executives;
                and


·
            All
                of our officers and Directors as a group.





As
      of the
      foregoing date, there were no other persons, individually or as a group, known
      to us to be deemed the beneficial owners of five percent or more of the issued
      and outstanding Common Stock.





This
      table is based upon information supplied by Schedules 13D and 13G, if any,
      filed
      with the Securities and Exchange Commission, and information obtained from
      our
      directors and named executives. For purposes of this table, a person or group
      of
      persons is deemed to have “beneficial ownership” of any shares of Common Stock
      which such person has the right to acquire within 60 days of October
      3 ,
      2008 .
      For
      purposes of computing the percentage of outstanding shares of Common Stock
      held
      by each person or group of persons named in the table, any security which such
      person or persons has or have the right to acquire within such date is deemed
      to
      be outstanding but is not deemed to be outstanding for the purpose of computing
      the percentage ownership of any other person. Except as indicated in the
      footnotes to this table and pursuant to applicable community property laws,
      we
      believe, based on information supplied by such persons, that the persons named
      in this table have sole voting and investment power with respect to all shares
      Common Stock which they beneficially own. Unless otherwise noted, the address
      of
      each of the principal stockholders is care of us at 76 Beaver Street,
      14 th floor,
      New York, NY10005.





55





Name and Address
            
            Amount & Natureof Beneficial
            
            of Beneficial
            
            ApproximateOwner
            
            Ownership
            
            Percentage(1)Gifford A. Dieterle*
            
            
            3,612,455
            (2)
            
            1.9
            %Robert
                Roningen*
            
            
            1,828,750
            (3)
            
            
            **2955
                Strand RoadDuluth,
                MN 55804Jeffrey
                W. Pritchard*
            
            
            1,856,354
            (2)
            
            1.0
            %Christopher
                Chipman*
            
            
            1,500,000
            (2)
            
            
            **4014
                Redwing LaneAudubon,
                PA 19407Roger
                A Newell*
            
            
            1,537,273
            (2)
            
            
            **1781
                South Larkspur DriveGolden,
                CO 80401John
                Brownlie*6040
                Puma RidgeLittleton,
                CO 80124
            
            
            1,599,500
            (2)
            
            
            **Scott
                Hazlitt*
            
            
            1,500,000
            (2)
            
            
            **9428
                W. Highway 50Salida.
                CO 81201Ian
                A. Shaw*
            
            
            265,000
            (2)
            
            
            **98
                Crimson MillwayToronto,
                Ontario M2LIT6CanadaJohn
                Postle*
            
            
            265,000
            (2)
            
            
            **2169
                Constance DriveOakville
                OntarioCanada
                L6j 5l2Mark
                T. Nesbitt*
            
            
            306,666
            (2)(4)
            
            
            **1580
                Lincoln St., Ste. 700Denver
                CO 80203-1501Strategic
                Precious Metal Fund
            
            
            12,500,000
            
            
            6.5
            %c/o
                Banque Cantonale VaoudoisePlace
                St-Francois 141003
                Lausanne, Switzerland




56




SPGP
            
            
            11,250,000
            (5)
            
            5.8
            %17,
                Avenue Matignon75008
                Paris, FranceStandard
                Bank PLC
            
            
            15,750,000
            
            
            8.2
            %320
                Park AvenueNew
                York, NY 10022Van
                Eck International Investors
            
            
            10,000,000
            (6)
            
            5.2
            %Gold
                Fund99
                Park AvenueNew
                York, NY 10016andVan
                Eck Long/Short GoldPortfolio
                Ltd.Ogier
                Fiduciary ServicesPO
                box 1234Queensgate
                HouseSouth
                Church StreetGeorgetownGrand
                Cayman, Cayman IslandsAll
                Officers andDirectors
                as aGroup
                (10 persons)
            
            
            14,270,998
            (2)(3)(4)
            
            7.2
            %








*
            Officer
                and/or Director of Capital Gold.


**
            Less
                than 1%.





(1)
            Based
                upon 192,974,824 shares issued and outstanding as of October 24,
                2008.





(2)
            For
                Messrs. Dieterle, Roningen, Pritchard, Chipman, Newell, Brownlie,
                Hazlitt,
                Shaw, Postle and Nesbitt includes, respectively, 500,000 shares,
                100,000
                shares, 500,000 shares, 1,100,000 shares, 100,000 shares, 750,000
                share,
                350,000 shares, 250,000 shares, 250,000 shares and 250,000 shares
                issuable
                upon exercise of options.





(3)
            Represents
                shares owned by Mr. Roningen’s wife. All of the foregoing shares are
                pledged as collateral for payment of a bank
                note.





(4)
            Includes
                shares owned jointly with his wife.





(5)
            We
                have been advised that Xavier Roulet, is a natural person with voting
                and
                investment control over shares of our common stock beneficially owned
                by
                SPGP.





(6)
            Represents
                shares owned by the listed stockholders. Separately, the stockholders
                do
                not beneficially own in excess of 5% of our outstanding shares of
                Common
                Stock. However, both stockholders have identified Joseph Foster as
                a
                natural person with voting and investment control over shares of
                our
                common stock beneficially owned by the stockholders. Mr. Foster is
                the
                portfolio manager for Van Eck Associates Corporation and Van Eck
                Absolute
                Return Advisers Corp., the investment advisors for, respectively,
                Van Eck
                International Investors Gold Fund and Van Eck Long/Short Gold Portfolio
                Ltd.




57




**Item
              13.**
            **Certain
                Relationships and Related Transactions, and Director Independence
                (000’s).**





In
      August
      2002, we purchased marketable equity securities of a related company. We
      recorded approximately $6 and $9 in expense reimbursements including office
      rent
      from this entity for the year ended July 31, 2008 and 2007, respectively.





We
      utilize a Mexican corporation 100% owned by two of our officers/Directors and
      stockholders for mining support services. These services include but are not
      limited to the payment of mining salaries and related costs. The Mexican
      Corporation bills us for these services at cost. Mining expenses charged by
      the
      Mexican Corporation and eliminated upon consolidation amounted to approximately
      $3,775 and $702 for the year ended July 31, 2008 and 2007,
      respectively.





During
      the years ended July 31, 2008 and 2007, we paid Jack Everett, a former officer
      and director, consulting fees of $100 and $0, respectively. In addition, this
      individual earned wages of $120 during the year ended July 31, 2007. Also,
      during the year ended July 31, 2008 and 2007, we paid a director legal and
      consulting fees of $35 and $24, respectively. ****





On
      December 20, 2007, at the recommendation of the Compensation Committee of the
      Board of Directors, our executive officers, directors and employees were granted
      1,095,000 restricted shares under our 2006 Equity Incentive Plan. The restricted
      shares granted vest equally over three years from the date of grant. In
      addition, our executive officers were granted 3,150,000 stock options under
      our
      2006 Equity Incentive Plan. The stock options have a term of seven years and
      vest as follows: 20% vested upon issuance and the balance vest 20% annually
      thereafter. The exercise price of the stock options is $0.63 per share (per
      the
      Plan, the closing price on the Toronto Stock Exchange on the trading day
      immediately prior to the day of determination converted to U.S. Dollars). In
      the
      event of a termination of continuous service (other than as a result of a change
      of control, as defined in the Plan, unvested stock options shall terminate
      and,
      with regard to vested stock options, the exercise period shall be the lesser
      of
      the original expiration date or one year from the date continuous service
      terminates. Upon the happening of a change of control, all unvested stock
      options and unvested restricted stock grants immediately vest.





On
      July
      17, 2008, at the recommendation of the Compensation Committee of the Board
      of
      Directors, our executive officers and directors were granted 515,000 shares
      under our 2006 Equity Incentive Plan. The restricted shares granted vested
      immediately.





We
      have
      employment and consulting agreements with our executive officers. Please see *“Item
      11. Executive Compensation; Employment and Engagement
      Agreements.”*





For
      information about the independence of our directors please see *“Item
      10. Directors, Executive Officers and Corporate Governance;* *Audit Committee and Audit Committee Expert* *.”*


58


**Item
              14.**
            **Principal
                Accountant Fees And
                Services.**





All
      audit
      and professional services provided by Wolinetz, Lafazan & Company, P.C.
      (“WL”), Certified Public Accountants, will be approved in advance by the Audit
      Committee to assure such services do not impair the auditor's independence
      from
      us. The total aggregate fees billed by WL were $125 and $140 for the fiscal
      years ended July 31, 2008 and 2007, respectively. The following table shows
      the
      detailed fees billed to us by WL for professional services rendered during
      these
      fiscal years.





**Amount ($000’s)****Description of Fees**
            
            
            **2008**
            
            
            **2007**Audit Fees
            
            $
            115
            
            $
            130Audit-Related
                Fees
            
            
            -
            
            
            -Tax
                Fees
            
            
            10
            
            
            10All
                Other Fees
            
            
            -
            
            
            -Total
            
            $
            125
            
            $
            140





Audit
      Fees





Represents
      fees for professional services provided for the audit of our annual financial
      statements, services that are performed to comply with generally accepted
      auditing standards, and review of our financial statements included in our
      quarterly reports and services in connection with statutory and regulatory
      filings.




Audit-Related
      Fees





Represents
      the fees for assurance and related services that are reasonably related to
      the
      performance of the audit or review of our financial statements. The Board of
      Directors considers WL to be well qualified to serve as our independent public
      accountants.





The
      Audit
      Committee will pre-approve all auditing services and the terms thereof (which
      may include providing comfort letters in connection with securities
      underwriting) and non-audit services (other than non-audit services prohibited
      under Section 10A(g) of the Exchange Act or the applicable rules of the SEC
      or
      the Public Company Accounting Oversight Board) to be provided to us by the
      independent auditor; provided, however, the pre-approval requirement is waived
      with respect to the provisions of non-audit services for us if the "de minimus"
      provisions of Section 10A(i)(1)(B) of the Exchange Act are satisfied. This
      authority to pre-approve non-audit services may be delegated to one or more
      members of the Audit Committee, who shall present all decisions to pre-approve
      an activity to the full Audit Committee at its first meeting following such
      decision. The Audit Committee may review and approve the scope and staffing
      of
      the independent auditors' annual audit plan.





Tax
      Fees





This
      represents professional services rendered for tax compliance, tax advice and
      tax
      planning.





All
      Other
      Fees





WL
      was
      paid no other fees for professional services during the fiscal years ended
      July
      31, 2008 and 2007.




59




**PART
      IV**





**Item
              15.**
            **Exhibits
                and Financial Statement Schedules.**





( a)  Financial
      Statements and Schedules See index to financial statements on page F-1 of this
      Annual Report.





All
      other
      schedules called for under regulation S-X are not submitted because they are
      not
      applicable or not required, or because the required information is included
      in
      the financial statements or notes thereto.


**** (b)  Exhibits




3.1
            
            Certificate
                of Incorporation of Company.(20)3.2
            
            Amendments
                to Certificate of Incorporation of Company.(17)(21)3.3
            
            Certificate
                of Merger (Delaware) (which amends our Certificate of
                Incorporation)(20)3.4
            
            Amended
                and Restated By-Laws of Company(22)4.1
            
            Specimen
                certificate representing our Common Stock.(8)4.2
            
            Form
                of Warrant for Common Stock of the Company issued in February 2005
                private
                placement.(7)4.3
            
            Form
                of Warrant for Common Stock of the Company issued to Standard Bank
                in
                2005.(9)4.4
            
            Form
                of Warrant for Common Stock of the Company issued in February and
                March
                2006 private placement.(13)4.5
            
            Form
                of Warrant for Common Stock of the Company issued in the January
                2007
                private placement.(16)4.6
            
            Form
                of Placement Agent Warrant for Common Stock of the Company issued
                in the
                January 2007 private placement.(16)4.7
            
            Form
                of Warrant for Common Stock of the Company issued to Standard Bank
                in
                2008.10.1
            
            Mining
                Claims (1)10.2
            
            Stock
                Purchase Option Agreement from AngloGold (2)10.3
            
            Letter
                of Intent with International Northair Mines Ltd. (2)10.4
            
            March
                30, 2002 Minera Chanate Stock Purchase and Sale and Security Agreement
                (Sale by us and Holding of all of the stock of Minera Chanate) (In
                Spanish).(3)10.5
            
            English
                summary of March 30, 2002 Minera Chanate Stock Purchase and Sale
                and
                Security Agreement.(3)10.6
            
            Agreement
                between Santa Rita and Grupo Minero FG.(4)10.7
            
            Amendment
                to Agreement between Santa Rita and Grupo Minero FG.(5)10.8
            
            Termination
                Agreement between Santa Rita and Grupo Minero FG.(6)10.9
            
            English
                summary of El Charro agreement. (10)10.10
            
            Plan
                and agreement of merger (reincorporation). (11)10.11
            
            Contract
                between MSR and Sinergia Obras Civiles y Mineras, S.A. de
                C.V.(12)10.12
            
            Amendment
                to Contract between MSR and Sinergia Obras Civiles y Mineras, S.A.
                de C.V.
                (18)10.13
            
            Chipman
                Second Amended Engagement Agreement.10.14
            
            Employment
                Agreement with John Brownlie. (15)(23)10.15
            
            June
                1, 2006 EPCM agreement between MSR and a Mexican subsidiary of M3
                Engineering & Technology Corporation
                (15)




60




10.16
            
            Credit
                Agreement dated August 15, 2006 among MSR and Oro, as the borrowers,
                the
                Company, as the guarantor, and Standard Bank PLC, as the lender and
                the
                offshore account holder. (14)10.17
            
            Employment
                Agreement with Gifford A. Dieterle. (18)10.18
            
            Employment
                Agreement with Jeffrey W. Pritchard. (18)10.19
            
            Employment
                Agreement with J. Scott Hazlitt.10.20
            
            2006
                Equity Incentive Plan. (19)10.21
            
            Amendment
                to Employment Agreement with Gifford A. Dieterle. (24)10.22
            
            Amendment
                to Employment Agreement with Jeffrey W. Pritchard. (24)10.23
            
            Amendment
                to Employment Agreement with John Brownlie. (24)10.24
            
            Amendment
                to Employment Agreement with J. Scott Hazlitt. (24)10.25
            
            Amendment
                to Employment Agreement with Gifford A. Dieterle.10.26
            
            Amendment
                to Employment Agreement with Jeffrey W. Pritchard.10.27
            
            Amendment
                to Employment Agreement with John Brownlie.10.28
            
            Amendment
                to Employment Agreement with J. Scott Hazlitt.10.29
            
            Amendment
                to Engagement Agreement with Christopher Chipman.10.30
            
            Engagement
                Agreement with John Brownlie.10.31
            
            Amended
                And Restated Credit Agreement with Standard Bank.21
            
            Subsidiaries
                of the Registrant. (8)23.1
            
            Consent
                of Wolinetz, Lafazan & Company, P.C., independent registered public
                accountants.31.1
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Executive Officer31.2
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Financial Officer32.1
            
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Executive Officer32.2
            
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Financial Officer








(1)
            Previously
                filed as an exhibit to the Company's Registration Statement on Form
                S-18
                (SEC File No. 2-86160-NY) filed on or about November 10, 1983, and
                incorporated herein by this reference.(2)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended January 31, 2001 filed with the Commission on or
                about
                March 16, 2001, and incorporated herein by this
                reference.(3)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended April 30, 2002 filed with the Commission on or
                about
                June 20, 2002, and incorporated herein by this
                reference.




61




(4)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended January 31, 2002 filed with the Commission on or
                about
                March 25, 2002, and incorporated herein by this
                reference.(5)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about January 22, 2004, and incorporated herein
                by
                this reference.(6)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about April 12, 2004, and incorporated herein
                by this
                reference.(7)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about February 10, 2005, and incorporated herein
                by
                this reference.(8)
            Previously
                filed as an exhibit to the Company's Registration Statement on Form
                SB-2
                (SEC file no. 333-123216) filed with the Commission on or about March
                9,
                2005, and incorporated herein by this reference.(9)
            Previously
                filed as an exhibit to Amendment No. 1 to the Company's Registration
                Statement on Form SB-2 (SEC file no. 333-123216) filed with the Commission
                on or about June 27, 2005, and incorporated herein by this
                reference.(10)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended April 30, 2005 filed with the Commission on or
                about
                June 20, 2005, and incorporated herein by this
                reference.(11)
            Previously
                filed as Appendix B to the Company's Definitive 14A Proxy Statement
                filed
                with the Commission on or about October 7, 2005, and incorporated
                herein
                by this reference.(12)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended October 31, 2005 filed with the Commission on or
                about
                December 15, 2005, and incorporated herein by this
                reference.(13)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about February 16, 2006, and incorporated herein
                by
                this reference.(14)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about August 16, 2006, and incorporated herein
                by
                this reference.(15)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended April 30, 2006 filed with the Commission on or
                about
                June 19, 2006, and incorporated herein by this
                reference.




62




(16)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about January 29, 2007, and incorporated herein
                by
                this reference.(17)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended January 31, 2007 filed with the Commission on or
                about
                March 19, 2007, and incorporated herein by this
                reference.(18)
            Previously
                filed as an exhibit to the Company's Annual Report on Form 10-K for
                the
                fiscal year ended July 31, 2006 filed with the Commission on or about
                November 1, 2006, and incorporated herein by this
                reference.(19)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended October 31, 2006 filed with the Commission on or
                about
                December 19, 2006, and incorporated herein by this
                reference.(20)
            Previously
                filed as an exhibit to the Company's Registration Statement on Form
                SB-2
                (SEC file no. 333-129939) filed with the Commission on or about November
                23, 2005, and incorporated herein by this reference.(21)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about January 30, 2008, and incorporated herein
                by
                this reference.(22)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about April 17, 2008, and incorporated herein
                by this
                reference.(23)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended October 31, 2007 filed with the Commission on or
                about
                December 17, 2007, and incorporated herein by this
                reference.(24)
            Previously
                filed as an exhibit to the Company's Annual Report on Form 10-K for
                the
                fiscal year ended July 31, 2007 filed with the Commission on or about
                October 23, 2007, and incorporated herein by this
                reference.





Statements
      contained in this Form 10-K as to the contents of any agreement or other
      document referred to are not complete, and where such agreement or other
      document is an exhibit to this Report or is included in any forms indicated
      above, each such statement is deemed to be qualified and amplified in all
      respects by such provisions.


63


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the registrant has duly caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.





CAPITAL
                GOLD CORPORATIONDated:
                October 29, 2008
            By:
            /s/
                Gifford A. Dieterle, PresidentGifford
                A. Dieterle, President





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





SIGNATURES
            
            TITLE
            
            DATE/s/
                Gifford A. Dieterle
            
            President,
            
            October
                29, 2008Gifford
                A. Dieterle
            
            Treasurer,and
                Chairmanof
                the Board of Directors/s/
                Christopher M. Chipman
            
            Principal
                FinancialChristopher
                M. Chipman
            
            and
                Accounting Officer
            
            October
                29, 2008/s/
                Robert N. Roningen
            
            Director
            
            October
                29, 2008Robert
                N. Roningen/s/
                John Brownlie
            
            Director
            
            October
                29, 2008John
                Brownlie/s/
                Roger A. Newell
            
            Director
            
            October
                29, 2008Roger
                A. Newell/s/
                Jeffrey W. Pritchard
            
            Director
            
            October
                29, 2008Jeffrey
                W. Pritchard/s/
                John Postle
            
            Director
            
            October
                29, 2008John
                Postle/s/
                Ian Shaw
            
            Director
            
            October
                29, 2008Ian
                Shaw/s/
                Mark T. Nesbitt
            
            Director
            
            October
                29, 2008Mark
                T. Nesbitt


64






SUPPLEMENTAL
      INFORMATION





Supplemental
      Information to be Furnished With Reports Filed Pursuant to Section 15(d) of
      the Act by Registrants Which Have Not Registered Securities Pursuant to
      Section 12 of the Act.





NOT
      APPLICABLE.




65





REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      The
      Board of Directors and Stockholders of


Capital
      Gold Corporation


New
      York,
      New York





We
      have
      audited the accompanying consolidated balance sheet of Capital Gold Corporation
      and Subsidiaries (“the Company”) as of July 31, 2008 and July 31, 2007, and the
      related consolidated statements of operations, changes in stockholders’ equity
      and cash flows for each of the three years in the period ended July 31, 2008.
      These consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.





We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstance, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. Also, an audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Capital Gold
      Corporation and Subsidiaries as of July 31, 2008 and July 31, 2007 and the
      consolidated results of their operations and their cash flows for each of the
      three years in the period ended July 31, 2008 in conformity with accounting
      principles generally accepted in the United States of America.





WOLINETZ,
      LAFAZAN & COMPANY, P.C.





Rockville
      Centre, New York


October
      28, 2008


F-1





CAPITAL
      GOLD CORPORATION


CONSOLIDATED
      BALANCE SHEET


(in
      thousands, except for share and per share amounts)




July 31,
                2008
              
              July 31,
                2007ASSETSCurrent
                  Assets:Cash
                  and Cash Equivalents (Note 2)
              
              $
              10,992
              
              $
              2,225Accounts
                  Receivable (Note 2)
              
              
              1,477
              
              
              -Stockpiles
                  and Ore on Leach Pads (Note 5)
              
              
              12,176
              
              
              2,997Material
                  and Supply Inventories (Note 4)
              
              
              937
              
              
              174Deposits
                  (Note 6)
              
              
              9
              
              
              879Marketable
                  Securities (Note 3)
              
              
              65
              
              
              90Prepaid
                  Expenses
              
              
              219
              
              
              72Loans
                  Receivable – Affiliate (Note 12 and 14)
              
              
              39
              
              
              47Other
                  Current Assets (Note 7)
              
              
              490
              
              
              1,675Total
                  Current Assets
              
              
              26,404
              
              
              8,159Mining
                  Concessions (Note 11)
              
              
              59
              
              
              68Property
                  & Equipment – net (Note 8)
              
              
              20,918
              
              
              18,000Intangible
                  Assets – net (Note 9)
              
              
              181
              
              
              577Other
                  Assets:Other
                  Investments
              
              
              -
              
              
              28Deferred
                  Financing Costs (Note 17)
              
              
              599
              
              
              581Mining
                  Reclamation Bonds (Note 10)
              
              
              82
              
              
              36Other
              
              
              -
              
              
              42Deferred
                  Tax Asset (Note 22)
              
              
              573
              
              
              -Security
                  Deposits
              
              
              63
              
              
              60Total
                  Other Assets
              
              
              1,317
              
              
              747Total
                  Assets
              
              $
              48,879
              
              $
              27,551LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCurrent
                  Liabilities:Accounts
                  Payable
              
              $
              788
              
              $
              617Accrued
                  Expenses (Note 21)
              
              
              2,673
              
              
              603Derivative
                  Contracts (Note 20)
              
              
              930
              
              
              596Deferred
                  Tax Liability (Note 22)
              
              
              2,063
              
              
              -Current
                  Portion of Long-term Debt (Note 17)
              
              
              4,125
              
              
              -Total
                  Current Liabilities
              
              
              10,579
              
              
              1,816Reclamation
                  and Remediation Liabilities (Note 13)
              
              
              1,666
              
              
              1,249Other
                  liabilities
              
              
              62
              
              
              -Long-term
                  Debt (Note 17)
              
              
              8,375
              
              
              12,500Total
                  Long-term Liabilities
              
              
              10,103
              
              
              13,749Commitments
                  and Contingencies (Note 23)
              
              
              -
              
              
              -Stockholders’
                  Equity:Common
                  Stock, Par Value $.0001 Per Share;Authorized 300,000,000 shares;
                  Issued
                  and Outstanding 192,777,324 and 168,173,148 shares,
                  respectively
              
              
              19
              
              
              17Additional
                  Paid-In Capital
              
              
              63,074
              
              
              54,016Accumulated
                  Deficit
              
              
              (32,496
              )
              
              (38,861
              )Deferred
                  Financing Costs (Note 17)
              
              
              (2,611
              )
              
              (3,438
              )Deferred
                  Compensation
              
              
              (549
              )
              
              (52
              )Accumulated
                  Other Comprehensive Income (Note 14)
              
              
              760
              
              
              304Total
                  Stockholders’ Equity
              
              
              28,197
              
              
              11,986Total
                  Liabilities and Stockholders’ Equity
              
              $
              48,879
              
              $
              27,551





The
      accompanying notes are an integral part of the financial
      statements.


F-2





CAPITAL
      GOLD CORPORATION


CONSOLIDATED
      STATEMENT OF OPERATIONS


(in
      thousands, except for share and per share amounts)




For The Year EndedJuly 31,2008
              
              2007
              
              2006RevenuesSales
                  – Gold, net
              
              $
              33,104
              
              $
              -
              
              $
              -Costs
                  and Expenses:Costs
                  Applicable to Sales
              
              
              10,690
              
              
              -
              
              
              -Depreciation
                  and Amortization
              
              
              3,438
              
              
              891
              
              
              39General
                  and Administrative
              
              
              5,405
              
              
              2,760
              
              
              2,136Exploration
              
              
              938
              
              
              1,816
              
              
              1,941Equity
                  Based Compensation
              
              
              181
              
              
              133
              
              
              89Total
                  Costs and Expenses
              
              
              20,652
              
              
              5,600
              
              
              4,205Income
                  (Loss) from Operations
              
              
              12,452
              
              
              (5,600
              )
              
              (4,205
              )Other
                  Income (Expense):Interest
                  Income
              
              
              77
              
              
              146
              
              
              184Interest
                  Expense
              
              
              (1,207
              )
              
              (792
              )
              
              -Other
                  Income (Expense)
              
              
              (95
              )
              
              -
              
              
              (202
              )Loss
                  on change in fair value of derivative
              
              
              (1,356
              )
              
              (1,226
              )
              
              (582
              )Total
                  Other Income (Expense)
              
              
              (2,581
              )
              
              (1,872
              )
              
              (600
              )Income
                  (Loss) before Income Taxes
              
              
              9,871
              
              
              (7,472
              )
              
              (4,805
              )Income
                  Tax Expense (Note 22)
              
              
              (3,507
              )
              
              -
              
              
              -Net
                  Income (Loss)
              
              $
              6,364
              
              $
              (7,472
              )
              $
              (4,805
              )Income
                  (Loss) Per Common ShareBasic
              
              $
              0.04
              
              $
              (0.05
              )
              $
              (0.04
              )Diluted
              
              $
              0.03
              
              $
              -
              
              $
              -Basic
                  Weighted Average Common Shares Outstanding
              
              
              175,039,996
              
              
              149,811,266
              
              
              112,204,471Diluted
                  Weighted Average Common Shares Outstanding
              
              
              195,469,129
              
              
              -
              
              
              -




F-3





CAPITAL
      GOLD CORPORATION


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY


(in
      thousands, except for share and per share amounts)




AccumulatedAdditional
            
            
            
            Other
            
            Deferred
            
            
            
            TotalCommon
                Stock
            
            paid-in-
            
            Accumulated
            
            Comprehensive
            
            Financing
            
            Deferred
            
            Stockholders’Shares
            
            Amount
            
            capital
            
            Deficit
            
            Income/(Loss)
            
            Costs
            
            Compensation
            
            EquityBalance
                at July 31, 2006
            
            
            131,635,129
            
            
            13
            
            
            40,734
            
            
            (31,388
            )
            
            146
            
            
            (523
            )
            
            (52
            )
            
            8,930Deferred
                Financing Costs
            
            
            1,150,000
            
            
            -
            
            
            351
            
            
            -
            
            
            -
            
            
            (351
            )
            
            -
            
            
            -Deferred
                Financing Costs
            
            
            -
            
            
            -
            
            
            3,314
            
            
            -
            
            
            -
            
            
            (3,314
            )
            
            -
            
            
            -Amortization
                of Deferred Finance Costs
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            750
            
            
            -
            
            
            750Options
                and warrants issued for services
            
            
            -
            
            
            -
            
            
            216
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            216Private
                Placement, Net
            
            
            12,561,667
            
            
            2
            
            
            3,484
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,486Common
                Stock issued for services provided
            
            
            622,443
            
            
            -
            
            
            276
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            276Common
                Stock issued upon the exercising of options and warrants
            
            
            22,203,909
            
            
            2
            
            
            5,641
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,643Change
                in fair value on interest rate swaps
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (47
            )
            
            -
            
            
            -
            
            
            (47
            )Equity
                adjustment from foreign currency translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            205
            
            
            -
            
            
            -
            
            
            205Net
                loss for the year ended July 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            (7,472
            )
            
            -
            
            
            
            
            
            -
            
            
            (7,472
            )Balance
                at July 31, 2007
            
            
            168,173,148
            
            $
            17
            
            $
            54,016
            
            $
            (38,860
            )
            $
            304
            
            $
            (3,438
            )
            $
            (52
            )
            $
            11,987





The
      accompanying notes are an integral part of the financial statements .




F-4





CAPITAL
      GOLD CORPORATION


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY – CONTINUED


(in
      thousands, except for share and per share amounts)




AccumulatedAdditional
            
            
            
            Other
            
            Deferred
            
            
            
            TotalCommon
                Stock
            
            paid-in-
            
            Accumulated
            
            Comprehensive
            
            Financing
            
            Deferred
            
            Stockholders’Shares
            
            Amount
            
            capital
            
            Deficit
            
            Income/(Loss)
            
            Costs
            
            Compensation
            
            EquityBalance
                at July 31, 2007
            
            
            168,173,148
            
            $
            17
            
            $
            54,016
            
            $
            (38,860
            )
            $
            304
            
            $
            (3,438
            )
            $
            (52
            )
            $
            11,987Amortization
                of deferred finance costs
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            930
            
            
            -
            
            
            930Equity
                based compensation
            
            
            -
            
            
            -
            
            
            433
            
            
            -
            
            
            -
            
            
            -
            
            
            194
            
            
            627Common
                stock issued upon the exercising of options and warrants
            
            
            22,994,178
            
            
            2
            
            
            7,471
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,473Issuance
                of restricted common stock
            
            
            1,610,000
            
            
            -
            
            
            1,051
            
            
            
            
            
            
            
            
            
            
            
            (691
            )
            
            360Change
                in fair value on interest rate swaps
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (141
            )
            
            -
            
            
            -
            
            
            (141
            )Deferred
                finance costs
            
            
            -
            
            
            -
            
            
            103
            
            
            -
            
            
            -
            
            
            (103
            )
            
            -
            
            
            -Unrealized
                loss on marketable securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (25
            )
            
            -
            
            
            -
            
            
            (25
            )Equity
                adjustment from foreign currency translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            622
            
            
            -
            
            
            -
            
            
            622Net
                income for the year ended July 31, 2008
            
            
            -
            
            
            -
            
            
            -
            
            
            6,364
            
            
            -
            
            
            
            
            
            -
            
            
            6,364Balance
                at July 31, 2008
            
            
            192,777,326
            
            $
            19
            
            $
            63,074
            
            $
            (32,496
            )
            $
            760
            
            $
            (2,611
            )
            $
            (549
            )
            $
            28,197





The
      accompanying notes are an integral part of the financial statements .




F-5




CAPITAL
      GOLD CORPORATION


CONSOLIDATED
      STATEMENT OF CASH FLOWS


(in
      thousands, except for share and per share amounts)




For TheYear EndedJuly 31,2008
              
              2007
              
              2006Cash
                  Flow From Operating Activities:Net
                  Income (Loss)
              
              $
              6,364
              
              $
              (7,472
              )
              $
              (4,805
              )Adjustments
                  to Reconcile Net Loss to Net Cash Provided by (Used in) Operating
                  Activities:Depreciation
                  and Amortization
              
              
              3,285
              
              
              891
              
              
              39Accretion
                  of Reclamation and Remediation
              
              
              124
              
              
              31
              
              
              -Loss
                  on sale of property and equipment
              
              
              
              
              
              
              
              
              201Loss
                  on change in fair value of derivative, net
              
              
              1,356
              
              
              766
              
              
              582Equity
                  Based Compensation
              
              
              1,090
              
              
              492
              
              
              362Changes
                  in Operating Assets and Liabilities:Increase
                  in Accounts Receivable
              
              
              (1,477
              )
              
              -
              
              
              -Increase
                  in Prepaid Expenses
              
              
              (146
              )
              
              (32
              )
              
              (21
              )Increase
                  in Inventory
              
              
              (8,913
              )
              
              (2,458
              )
              
              -Increase
                  (Decrease) in Other Current Assets
              
              
              1,185
              
              
              2,975
              
              
              (5,243
              )Decrease
                  (Increase) in Other Deposits
              
              
              870
              
              
              (629
              )
              
              (170
              )Decrease
                  (Increase) in Other Assets
              
              
              -
              
              
              (50
              )
              
              1Increase
                  in Mining Reclamation Bond
              
              
              (46
              )
              
              -
              
              
              -Increase
                  in Deferred Tax Asset
              
              
              (573
              )
              
              -
              
              
              -Increase
                  in Accounts Payable
              
              
              171
              
              
              358
              
              
              167Decrease
                  in Derivative Liability
              
              
              (1,166
              )
              
              -
              
              
              -Increase
                  in Reclamation and Remediation
              
              
              -
              
              
              1,218
              
              
              -Increase
                  in Other Liability
              
              
              62
              
              
              
              
              
              -Increase
                  in Deferred Tax Liability
              
              
              2,063Increase
                  in Accrued Expenses
              
              
              2,069
              
              
              24
              
              
              166Net
                  Cash Provided By (Used in) Operating Activities
              
              
              6,318
              
              
              (3,663
              )
              
              (8,721
              )Cash
                  Flow From Investing Activities:Decrease
                  (Increase) in Other Investments
              
              
              28
              
              
              (4
              )
              
              -Purchase
                  of Mining, Milling and Other Property and Equipment
              
              
              (5,417)
              )
              
              (17,851
              )
              
              (811
              )Purchase
                  of Intangibles
              
              
              (90
              )
              
              (570
              )
              
              -Proceeds
                  on Sale of Mining, Milling and Other Property and
                  Equipment
              
              
              -
              
              
              -
              
              
              192Net
                  Cash Used in Investing Activities
              
              
              (5,479
              )
              
              (18,425
              )
              
              (619
              )





The
      accompanying notes are an integral part of the financial
      statements.


F-6





CAPITAL
      GOLD CORPORATION


CONSOLIDATED
      STATEMENT OF CASH FLOWS – CONTINUED


(in
      thousands, except for share and per share amounts)




For TheYear EndedJuly 31,2008
            
            2007
            
            2006Cash
                Flow From Financing Activities:Advances
                to Affiliate
            
            $
            7
            
            $
            (5
            )
            $
            (10
            )Proceeds
                from Borrowing on Credit Facility
            
            
            -
            
            
            12,500
            
            
            -Proceeds
                From Issuance of Common Stock
            
            
            7,474
            
            
            9,129
            
            
            8,115Deferred
                Finance Costs
            
            
            (175
            )
            
            (257
            )
            
            (351
            )Net
                Cash Provided By Financing Activities
            
            
            7,306
            
            
            21,367
            
            
            7,754Effect
                of Exchange Rate Changes
            
            
            622
            
            
            205
            
            
            46Increase
                (Decrease) In Cash and Cash Equivalents
            
            
            8,767
            
            
            (516
            )
            
            (1,540
            )Cash
                and Cash Equivalents - Beginning
            
            
            2,225
            
            
            2,741
            
            
            4,281Cash
                and Cash Equivalents – Ending
            
            $
            10,992
            
            $
            2,225
            
            $
            2,741Supplemental
                Cash Flow Information:Cash
                Paid For Interest
            
            $
            1,235
            
            $
            879
            
            $
            -Cash
                Paid For Income Taxes
            
            $
            1,373
            
            $
            23
            
            $
            15Non-Cash
                Financing Activities:Issuance
                of common stock and warrants as payment of financing costs
            
            $
            103
            
            $
            3,665
            
            $
            270Change
                in Fair Value of Derivative Instrument
            
            $
            141
            
            $
            47
            
            $
            -Change
                in Fair Value of Asset Retirement Obligation
            
            $
            293
            
            $
            -
            
            $
            -





The
      accompanying notes are an integral part of the financial
      statements.


F-7


CAPITAL
      GOLD CORPORATION


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


JULY
      31,
      2008





NOTE
      1 -
      Basis of Presentation





Capital
      Gold Corporation ("Capital Gold", "the Company", "we" or "us") was incorporated
      in February 1982 in the State of Nevada. During March 2003 the Company's
      stockholders approved an amendment to the Articles of Incorporation to change
      its name from Leadville Mining and Milling Corp. to Capital Gold Corporation.
      In
      November 2005, the Company reincorporated in Delaware. The Company owns rights
      to property located in the State of Sonora, Mexico and the California Mining
      District, Lake County, Colorado. The Company is engaged in the exploration,
      development and production for gold and other minerals from its properties
      in
      Mexico. All of the Company's mining activities are being performed in Mexico.





On
      June
      29, 2001, the Company exercised an option and purchased from AngloGold North
      America Inc. and AngloGold (Jerritt Canyon) Corp. (“AngloGold”) 100% of the
      issued and outstanding stock of Minera Chanate, S.A. de C.V., a subsidiary
      of
      those two companies (“Minera Chanate”). Minera Chanate's assets consisted of
      certain exploitation and exploration concessions in the States of Sonora,
      Chihuahua and Guerrero, Mexico. These concessions are sometimes referred to
      as
      the El Chanate Concessions.





Pursuant
      to the terms of the agreement, on December 15, 2001, the Company made a $50,000
      payment to AngloGold. AngloGold is entitled to receive the remainder of the
      purchase price by way of an ongoing percentage of net smelter returns of between
      2% and 4% plus 10% net profits interest (until the total net profits interest
      payment received by AngloGold equals $1,000,000). AngloGold's right to a payment
      of a percentage of net smelter returns and the net profits interest will
      terminate at such point as they aggregate $18,018,355. In accordance with the
      agreement, the foregoing payments are not to be construed as royalty payments.
      Should the Mexican government or other jurisdiction determine that such payments
      are royalties, the Company could be subject to and would be responsible for
      any
      withholding taxes assessed on such payments.





Under
      the
      terms of the agreement, the Company has granted AngloGold the right to designate
      one of its wholly-owned Mexican subsidiaries to receive a one time option (the
      “Option”) to purchase 51% of Minera Chanate (or such entity that owns the Minera
      Chanate concessions at the time of option exercise) (the “Back-In Right”). That
      Option is exercisable over a 180 day period commencing at such time as the
      Company notifies AngloGold that it has made a good faith determination that
      it
      has gold-bearing ore deposits on any one of the identified group of El Chanate
      Concessions, when aggregated with any ore that the Company has mined, produced
      and sold from such concessions, of in excess of 2,000,000 troy ounces of
      contained gold. The exercise price would equal twice the Company's project
      costs
      on the properties during the period commencing on December 15, 2000 and ending
      on the date of such notice.





In
      January 2008, pursuant to the terms of the agreement, the Company made a good
      faith determination and notified AngloGold that the drill indicated resources
      at
      the El Chanate gold mine exceeded two million ounces of contained gold. The
      term
      "drill indicated resources" is defined in the agreement. A drill indicated
      resource number does not rise to the level of, and should not be considered
      proven and probable reserves as those terms are defined under SEC guidelines.
      AngloGold had 180 days from the date of notification, or July 28, 2008, to
      determine whether or not it would choose to exercise the Option for the Back-In
      Right. On July 1, 2008, AngloGold notified the Company that it would not be
      exercising the Back-In Right.





During
      the fiscal year ended July 31, 2007, The Company exited the development stage
      since principal operations have commenced.




F-8


NOTE
      2 -
      Summary of Significant Accounting Policies





Principals
      of Consolidation





The
      consolidated financial statements include the accounts of Capital Gold
      Corporation and its wholly owned and majority owned subsidiaries, Leadville
      Mining and Milling Holding Corporation, Minera Santa Rita, S.A de R.L. de
      C.V.(“MSR”) and Oro de Altar S. de R. L. de C.V. (“Oro”) as well as the accounts
      within Caborca Industrial S.A. de C.V. (“Caborca Industriale”), a Mexican
      corporation 100% owned by two of the Company’s officers and directors for mining
      support services. These services include, but are not limited to, the payment
      of
      mining salaries and related costs. Caborca Industrial bills the Company for
      these services at cost. This entity is considered a variable interest entity
      under accounting rules provided under FIN 46, “Consolidation of Variable
      Interest Entities”. All significant intercompany accounts and transactions are
      eliminated in consolidation.





Cash
      and Cash Equivalents





The
      Company considers highly liquid investments with original maturities of three
      months or less from the date of purchase to be cash equivalents. Cash and cash
      equivalents include money market funds and/or short term U.S. treasury
      bonds.





Accounts
      Receivable





Accounts
      receivable represents amounts due but not yet received from customers upon
      sales
      of precious metals.





Marketable
      Securities





The
      Company accounts for its investments in marketable securities in accordance
      with
      Statement of Financial Accounting Standards No. 115, "Accounting for Certain
      Investments in Debt and Equity Securities."





Management
      determines the appropriate classification of all securities at the time of
      purchase and re-evaluates such designation as of each balance sheet date. The
      Company has classified its marketable equity securities as available for sale
      securities and has recorded such securities at fair value. The Company uses
      the
      specific identification method to determine realized gains and losses.
      Unrealized holding gains and losses are excluded from earnings and, until
      realized, are reported as a separate component of stockholders'
      equity.




Ore
      on
      Leach Pads and Inventories (“In-Process Inventory”)




Costs
      that are incurred in or benefit the productive process are accumulated as ore
      on
      leach pads and inventories. Ore on leach pads and inventories are carried at
      the
      lower of average cost or net realizable value. Net realizable value represents
      the estimated future sales price of the product based on current and long-term
      metals prices, less the estimated costs to complete production and bring the
      product to sale. Write-downs of ore on leach pads and inventories, resulting
      from net realizable value impairments, are reported as a component of *Costs
      applicable to sales* .
      The
      current portion of ore on leach pads and inventories is determined based on
      the
      expected amounts to be processed within the next 12 months. Ore on leach pads
      and inventories not expected to be processed within the next 12 months are
      classified as long-term. The major classifications are as follows:




F-9




*Ore
      on Leach Pads*




The
      recovery of gold from certain gold oxide ores is achieved through the heap
      leaching process. Under this method, oxide ore is placed on leach pads where
      it
      is treated with a chemical solution, which dissolves the gold contained in
      the
      ore. The resulting “pregnant” solution is further processed in a plant where the
      gold is recovered. Costs are added to ore on leach pads based on current mining
      costs, including applicable depreciation, depletion and amortization relating
      to
      mining operations. Costs are removed from ore on leach pads as ounces are
      recovered based on the average cost per estimated recoverable ounce of gold
      on
      the leach pad.




The
      estimates of recoverable gold on the leach pads are calculated from the
      quantities of ore placed on the leach pads (measured tons added to the leach
      pads), the grade of ore placed on the leach pads (based on assay data) and
      a
      recovery percentage (based on ore type). In general, leach pads recover
      approximately 50% to 75% of the recoverable ounces in the first year of
      leaching, declining each year thereafter until the leaching process is complete.




Although
      the quantities of recoverable gold placed on the leach pads are reconciled
      by
      comparing the grades of ore placed on pads to the quantities of gold actually
      recovered (metallurgical balancing), the nature of the leaching process
      inherently limits the ability to precisely monitor inventory levels. As a
      result, the metallurgical balancing process needs to be constantly monitored
      and
      estimates need to be refined based on actual results over time. The Company’s
      operating results may be impacted by variations between the estimated and actual
      recoverable quantities of gold on its leach pads. Variations between actual
      and
      estimated quantities resulting from changes in assumptions and estimates that
      do
      not result in write-downs to net realizable value will be accounted for on
      a
      prospective basis.




*In-process
      Inventory*




In-process
      inventories represent materials that are currently in the process of being
      converted to a saleable product. Conversion processes vary depending on the
      nature of the ore and the specific processing facility, but include mill
      in-circuit, leach in-circuit, flotation and column cells and carbon in-pulp
      inventories. In-process material are measured based on assays of the material
      fed into the process and the projected recoveries of the respective plants.
      In-process inventories are valued at the average cost of the material fed into
      the process attributable to the source material coming from the mines,
      stockpiles and/or leach pads plus the in-process conversion costs, including
      applicable depreciation relating to the process facilities incurred to that
      point in the process.




*Precious
      Metals Inventory*




Precious
      metals inventories include gold doré and/or gold bullion. Precious metals that
      result from the Company’s mining and processing activities are valued at the
      average cost of the respective in-process inventories incurred prior to the
      refining process, plus applicable refining costs.




*Materials
      and Supplies*





Materials
      and supplies are valued at the lower of average cost or net realizable value.
      Cost includes applicable taxes and freight.




Property,
      Plant and Mine Development




Expenditures
      for new facilities or equipment and expenditures that extend the useful lives
      of
      existing facilities or equipment are capitalized and depreciated using the
      straight-line method at rates sufficient to depreciate such costs over the
      estimated productive lives, which do not exceed the related estimated mine
      lives, of such facilities based on proven and probable reserves.




F-10




Mineral
      exploration costs are expensed as incurred. When it has been determined that
      a
      mineral property can be economically developed as a result of establishing
      proven and probable reserves, costs incurred prospectively to develop the
      property are capitalized as incurred and are amortized using the
      units-of-production (“UOP”) method over the estimated life of the ore body based
      on estimated recoverable ounces or pounds in proven and probable reserves.




Impairment
      of Long-Lived Assets




The
      Company reviews and evaluates its long-lived assets for impairment when events
      or changes in circumstances indicate that the related carrying amounts may
      not
      be recoverable. An impairment is considered to exist if the total estimated
      future cash flows on an undiscounted basis are less than the carrying amount
      of
      the assets, including goodwill, if any. An impairment loss is measured and
      recorded based on discounted estimated future cash flows. Future cash flows
      are
      estimated based on quantities of recoverable minerals, expected gold and other
      commodity prices (considering current and historical prices, price trends and
      related factors), production levels and operating costs of production and
      capital, all based on life-of-mine plans. Existing proven and probable reserves
      and value beyond proven and probable reserves, including mineralization other
      than proven and probable reserves and other material that is not part of the
      resource base, are included when determining the fair value of mine site
      reporting units at acquisition and, subsequently, in determining whether the
      assets are impaired. The term “recoverable minerals” refers to the estimated
      amount of gold or other commodities that will be obtained after taking into
      account losses during ore processing and treatment. Estimates of recoverable
      minerals from exploration stage mineral interests are risk adjusted based on
      management’s relative confidence in such materials. In estimating future cash
      flows, assets are grouped at the lowest level for which there are identifiable
      cash flows that are largely independent of future cash flows from other asset
      groups. The Company’s estimates of future cash flows are based on numerous
      assumptions and it is possible that actual future cash flows will be
      significantly different than the estimates, as actual future quantities of
      recoverable minerals, gold and other commodity prices, production levels and
      operating costs of production and capital are each subject to significant risks
      and uncertainties.




Reclamation
      and Remediation Costs (“Asset Retirement Obligations”)




Reclamation
      costs are allocated to expense over the life of the related assets and are
      periodically adjusted to reflect changes in the estimated present value
      resulting from the passage of time and revisions to the estimates of either
      the
      timing or amount of the reclamation and abandonment costs. The Asset Retirement
      Obligation is based on when the spending for an existing environmental
      disturbance and activity to date will occur. The Company reviews, on an annual
      basis, unless otherwise deemed necessary, the Asset Retirement Obligation at
      its
      mine site in accordance with Statement of Financial Accounting Standards
      No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”)




Deferred
      Financing Costs





Deferred
      financing costs which were included in other assets and a component of
      stockholders’ equity relate to costs incurred in connection with bank borrowings
      and are amortized over the term of the related borrowings.




Intangible
      Assets





Purchased
      intangible assets consisting of rights of way, easements and net profit
      interests are carried at cost less accumulated amortization. Amortization is
      computed using the straight-line method over the economic lives of the
      respective assets, generally five years or using the units of production method.
      It is the Company’s policy to assess periodically the carrying amount of its
      purchased intangible assets to determine if there has been an impairment to
      their carrying value. Impairments of other intangible assets are determined
      in
      accordance with SFAS 144. There was no impairment at July 31,
      2008.


F-11


Fair
      Value of Financial Instruments





The
      carrying value of the Company's financial instruments, including cash and cash
      equivalents, loans receivable and accounts payable approximated fair value
      because of the short maturity of these instruments.





Revenue
      Recognition





Revenue
      will be recognized, net of treatment and refining charges, from a sale when
      the
      price is determinable, the product has been delivered, the title has been
      transferred to the customer and collection of the sales price is reasonably
      assured. Revenues from by-product sales will be credited to *Costs
      applicable to sales* as a
      by-product credit.





Foreign
      Currency Translation





Assets
      and liabilities of the Company's Mexican subsidiaries are translated to US
      dollars using the current exchange rate for assets and liabilities. Amounts
      on
      the statement of operations are translated at the average exchange rates during
      the year. Gains or losses resulting from foreign currency translation are
      included as a component of other comprehensive income (loss).




Comprehensive
      Income (Loss)





Comprehensive
      income (loss) which is reported on the accompanying consolidated statement
      of
      stockholders' equity as a component of accumulated other comprehensive income
      (loss) consists of accumulated foreign translation gains and losses and net
      unrealized gains and losses on available-for-sale securities.





Income
      Taxes





The
      Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
      Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
      of FIN 48 is to clarify and set forth consistent rules for accounting for
      uncertain tax positions in accordance with Statement of Financial Accounting
      Standards No. 109, "Accounting for Income Taxes" (“SFAS 109”). The cumulative
      effect of applying the provisions of this interpretation are required to be
      reported separately as an adjustment to the opening balance of retained earnings
      in the year of adoption. The adoption of this standard did not have an impact
      on
      the financial condition or the results of the Company’s operations.




On
      October 1, 2007, the Mexican Government enacted legislation which introduces
      certain tax reforms as well as a new minimum flat tax system.  This new
      flat tax system integrates with the regular income tax system and is based
      on
      cash-basis net income that includes only certain receipts and
      expenditures.  The flat tax is set at 17.5% of cash-basis net income as
      determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
      respectively.  If the flat tax is positive, it is reduced by the regular
      income tax and any excess is paid as a supplement to the regular income
      tax.  If the flat tax is negative, it may serve to reduce the regular
      income tax payable in that year or can be carried forward for a period of up
      to
      ten years to reduce any future flat tax.




Companies
      are required to prepay income taxes on a monthly basis based on the greater
      of
      the flat tax or regular income tax as calculated for each monthly period. 
Annualized income projections indicate that the Company will not be liable
      for
      any excess flat tax for calendar year 2008 and, accordingly, has recorded a
      Mexican income tax provision as of July 31, 2008.




F-12


As
      the
      new legislation was recently enacted, it remains subject to ongoing varying
      interpretations.  There is the possibility of implementation amendments by
      the Mexican Government and the estimated future income tax liability recorded
      at
      the balance sheet date may change.





Deferred
      income tax assets and liabilities are determined based on differences between
      the financial statement reporting and tax bases of assets and liabilities and
      are measured using the enacted tax rates and laws in effect when the differences
      are expected to reverse. The measurement of deferred income tax assets is
      reduced, if necessary, by a valuation allowance for any tax benefits, which
      are
      not expected to be realized. The effect on deferred income tax assets and
      liabilities of a change in tax rates is recognized in the period that such
      tax
      rate changes are enacted.





Equity
      Based Compensation





In
      connection with offers of employment to the Company’s executives as well as in
      consideration for agreements with certain consultants, the Company issues
      options and warrants to acquire its common stock. Employee and non-employee
      awards are made at the discretion of the Board of Directors.





Such
      options and warrants may be exercisable at varying exercise prices currently
      ranging from $0.24 to $0.85 per share of common stock with certain of these
      grants becoming exercisable immediately upon grant. Certain grants vested or
      are
      vesting for a period of five years. Also, certain grants contain a provision
      whereby they become immediately exercisable upon a change of
      control.





Effective
      February 1, 2006, the Company adopted the provisions of Statement of Financial
      Accounting Standards No. 123R “Accounting for Stock Based Compensation” (“SFAS
      123R”). Under SFAS 123R, share-based compensation cost is measured at the grant
      date, based on the estimated fair value of the award, and is recognized as
      expense over the requisite service period. The Company adopted the provisions
      of
      SFAS 123R using a modified prospective application. Under this method,
      compensation cost is recognized for all share-based payments granted, modified
      or settled after the date of adoption, as well as for any unvested awards that
      were granted prior to the date of adoption. Prior periods are not revised for
      comparative purposes. Because the Company previously adopted only the pro forma
      disclosure provisions of SFAS 123, it will recognize compensation cost relating
      to the unvested portion of awards granted prior to the date of adoption, using
      the same estimate of the grant-date fair value and the same attribution method
      used to determine the pro forma disclosures under SFAS 123, except that
      forfeitures rates will be estimated for all options, as required by SFAS
      123R.





The
      cumulative effect of applying the forfeiture rates is not material. SFAS 123R
      requires that excess tax benefits related to stock option exercises be reflected
      as financing cash inflows instead of operating cash inflows.




F-13


The
      fair
      value of each option award is estimated on the date of grant using a
      Black-Scholes option valuation model. Expected volatility is based on the
      historical volatility of the price of the Company stock. The risk-free interest
      rate is based on U.S. Treasury issues with a term equal to the expected life
      of
      the option. The Company uses historical data to estimate expected dividend
      yield, expected life and forfeiture rates. The estimated per share weighted
      average grant-date fair values of stock options and warrants granted during
      the
      year ended July 31, 2008 and 2007, were $0.62 and $0.33, respectively. The
      fair
      values of the options and warrants granted were estimated based on the following
      weighted average assumptions:





Year
                ended July 31,2008
            
            2007Expected
                volatility
            
            
            47.60
                – 60.88%
            
            
            73%Risk-free
                interest rate
            
            
            4.61%
            
            
            5.75%Expected
                dividend yield
            
            
            -
            
            
            -Expected
                life
            
            
            5.5
                years
            
            
            2.4
                years




Stock
      option and warrant activity for employees during the years ended July 31, 2008
      and 2007 is as follows (all tables in thousands, except for option, price and
      term data):


Number of
                Options
              
              Weighted
                Average
                exercise
                price
              
              Weighted
                average
                remaining
                contracted
                term (years)
              
              Aggregate
                intrinsic
                valueOutstanding at July 31, 2006
              
              
              5,570,454
              
              $
              .16
              
              
              1.17
              
              $
              702Options
                  granted
              
              
              1,050,000
              
              
              .36Options
                  exercised
              
              
              (3,570,909
              )
              
              .08
              
              
              -
              
              
              -Options
                  expired
              
              
              (549,545
              )
              
              .22
              
              
              -
              
              
              -Warrants
                  and options outstanding at July 31, 2007
              
              
              2,500,000
              
              $
              .34
              
              
              1.20
              
              $
              255Options
                  granted*
              
              
              2,500,000
              
              
              .63
              
              
              -
              
              
              -Options
                  exercised
              
              
              (1,450,000
              )
              
              .32
              
              
              -
              
              
              -Options
                  expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -Warrants
                  and options outstanding at July 31, 2008
              
              
              3,550,000
              
              $
              .55
              
              
              4.00
              
              $
              334Warrants
                  and options exercisable at July 31, 2008
              
              
              1,800,000
              
              $
              .47
              
              
              2.83
              
              $
              308




*
      Issuances under 2006 Equity Incentive Plan.




F-14




Unvested
      stock option and warrant balances for employees at July 31, 2008 are as
      follows:


Number ofOptions
              
              Weighted
                Average
                Exercise
                price
              
              Weighted
                average
                remaining
                contracted
                term (years)
              
              Aggregate
                IntrinsicvalueOutstanding
                  at August 1, 2007
              
              
              150,000
              
              $
              .32
              
              
              0.67
              
              $
              18Options
                  granted
              
              
              2,500,000
              
              $
              .63
              
              
              -
              
              
              -Options
                  vested
              
              
              (900,000
              )
              $
              .58
              
              
              -
              
              
              -Unvested
                  Options outstanding at July 31, 2008
              
              
              1,750,000
              
              $
              .63
              
              
              4.49
              
              $
              8




Stock
      option and warrant activity for non-employees during the year ended July 31,
      2008 is as follows:


Number
                  ofOptions
              
              Weighted
                Average
                Exercise
                price
              
              Weighted
                average
                remaining
                contracted
                term
                  (years)
              
              Aggregate
                IntrinsicvalueWarrants
                  and options outstanding at July 31, 2006
              
              
              25,561,000
              
              $
              .29
              
              
              1.33
              
              $
              1,940Options
                  granted
              
              
              16,982,542
              
              
              .33Options
                  exercised
              
              
              (18,633,000
              )
              
              .29
              
              
              -
              
              
              -Options
                  expired
              
              
              (1,375,000
              )
              
              .31
              
              
              -
              
              
              -Warrants
                  and options outstanding at July 31, 2007
              
              
              22,535,542
              
              $
              .33
              
              
              1.48
              
              $
              2,578Options
                  granted*
              
              
              1,715,000
              
              $
              .66
              
              
              -
              
              
              -Options
                  exercised
              
              
              (21,555,542
              )
              
              .33
              
              
              -
              
              
              -Options
                  expired
              
              
              (680,000
              )
              
              .30
              
              
              -
              
              
              -Warrants
                  and options outstanding at July 31, 2008
              
              
              2,015,000
              
              $
              .62
              
              
              3.54
              
              $
              54Warrants
                  and options exercisable at July 31, 2008
              
              
              1,560,000
              
              $
              .61
              
              
              2.71
              
              $
              48




*
      1,115,000 issued under 2006 Equity Incentive Plan.




F-15




Unvested
      stock option and warrant balances for non-employees at July 31, 2008 are as
      follows:


Number ofOptions
              
              Weighted
                Average
                Exercise
                price
              
              Weighted
                average
                remaining
                contracted
                term (years)
              
              Aggregate
                IntrinsicvalueOutstanding
                  at August 1, 2007
              
              
              -
              
              
              -
              
              
              -
              
              
              -Options
                  granted
              
              
              650,000
              
              $
              .63
              
              
              -
              
              
              -Options
                  vested
              
              
              (195,000
              )
              $
              .63
              
              
              -
              
              
              -Unvested
                  Options outstanding at July 31, 2008
              
              
              455,000
              
              $
              .63
              
              
              4.49
              
              $
              3




The
      impact on the Company’s results of operations of recording equity based
      compensation for the year ended July 31, 2008, for employees and non-employees
      was approximately $987 and reduced earnings per share by $0.01 per basic and
      diluted share.




As
      of
      July 31, 2008, there was approximately $686 of unrecognized equity based
      compensation cost related to options granted to executives and employees which
      have not yet vested.





Reclassifications




Certain
      items in these financial statements have been reclassified to conform to the
      current period presentation. These reclassifications had no impact on the
      Company’s results of operations, stockholders’ equity or cash
      flows.




Net
      Loss Per Common Share





Basic
      and
      diluted net loss per share is computed using the weighted average number of
      shares of common stock outstanding during the period. Equivalent common shares,
      consisting of stock options and warrants, which amounted to 25,035,542 and
      31,131,454 shares, respectively, are excluded from the calculation of diluted
      net loss per share for the fiscal years ended July 31, 2007 and 2006 since
      their
      effect is antidilutive.





Concentrations
      of Credit Risk





Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk consist principally of cash and cash equivalents and marketable
      securities. The Company maintains cash balances at financial institutions which
      exceed the Federal Deposit Insurance Corporation limit of $100,000 at times
      during the year.




F-16


Accounting
      for Derivatives and Hedging Activities





The
      Company entered into two identically structured derivative contracts with
      Standard Bank in March 2006. Each derivative consisted of a series of forward
      sales of gold and a purchase gold cap. The Company agreed to sell a total volume
      of 121,927 ounces of gold forward to Standard Bank at a price of $500 per ounce
      on a quarterly basis during the period from March 2007 to September 2010. The
      Company also agreed to a purchase gold cap on a quarterly basis during this
      same
      period and at identical volumes covering a total volume of 121,927 ounces of
      gold at a price of $535 per ounce. Although these contracts are not designated
      as hedging derivatives, they serve an economic purpose of protecting the company
      from the effects of a decline in gold prices. Because they are not designated
      as
      hedges, however, special hedge accounting does not apply. Derivative results
      are
      simply marked to market through earnings, with these effects recorded in *other
      income* or *other
      expense* ,
      as
      appropriate under FASB Statement No. 133, “Accounting for Derivative Instruments
      and Hedging Activities” (“SFAS 133”).





The
      Company entered into interest rate swap agreements in accordance with the terms
      of its credit facility, which requires that the Company hedge at least 50
      percent of the Company’s outstanding debt under this facility. The agreements
      entered into cover $9,375,000 or 75% of the outstanding debt. Both swaps covered
      this same notional amount of $9,375,000, but over different time horizons.
      The
      first covered the six months commencing October 11, 2006 and terminated on
      March
      31, 2007 and the second covering the period from March 30, 2007 with a
      termination date of December 31, 2010. The interest rate swap agreements
      are accounted for as cash flow hedges, whereby “effective” hedge gains or losses
      are initially recorded in other comprehensive income and later reclassified
      to
      the interest expense component of earnings coincidently with the earnings impact
      of the interest expenses being hedged. “Ineffective” hedge results are
      immediately recorded in earnings also under interest expense. No component
      of
      hedge results will be excluded from the assessment of hedge effectiveness.





Use
      of
      Estimates





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and the disclosures of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from these estimates.





Recently
      Issued Accounting Pronouncements





On
      February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
      for Financial Assets and Financial Liabilities - Including an Amendment of
      FASB
      Statement No. 115. This standard permits an entity to choose to measure many
      financial instruments and certain other items at fair value. This option is
      available to all entities, including not-for-profit organizations. Most of
      the
      provisions in Statement 159 are elective; however, the amendment to FASB
      Statement No. 115, Accounting for Certain Investments in Debt and Equity
      Securities, applies to all entities with available-for-sale and trading
      securities. Some requirements apply differently to entities that do not report
      net income. The FASB's stated objective in issuing this standard is as follows:
      "to improve financial reporting by providing entities with the opportunity
      to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions".





The
      fair
      value option established by Statement 159 permits all entities to choose to
      measure eligible items at fair value at specified election dates. A business
      entity will report unrealized gains and losses on items for which the fair
      value
      option has been elected in earnings (or another performance indicator if the
      business entity does not report earnings) at each subsequent reporting date.
      A
      not-for-profit organization will report unrealized gains and losses in its
      statement of activities or similar statement. The fair value option: (a) may
      be
      applied instrument by instrument, with a few exceptions, such as investments
      otherwise accounted for by the equity method; (b) is irrevocable (unless a
      new
      election date occurs); and (c) is applied only to entire instruments and not
      to
      portions of instruments.





Statement
      159 is effective as of the beginning of an entity's first fiscal year that
      begins after November 15, 2007.  The Company elected not to adopt the fair
      value option for any eligible instruments.




F-17


On
      December 4, 2007, the FASB issued FASB Statement No. 160, *“Noncontrolling
      Interests in Consolidated Financial Statements - An Amendment of ARB No.
      51.”* Statement 160 establishes new accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary. Specifically, this statement requires the recognition of a
      noncontrolling interest (minority interest) as equity in the consolidated
      financial statements and separate from the parent's equity. The amount of net
      income attributable to the noncontrolling interest will be included in
      consolidated net income on the face of the income statement. Statement 160
      clarifies that changes in a parent's ownership interest in a subsidiary that
      do
      not result in deconsolidation are equity transactions if the parent retains
      its
      controlling financial interest. In addition, this statement requires that a
      parent recognize a gain or loss in net income when a subsidiary is
      deconsolidated. Such gain or loss will be measured using the fair value of
      the
      noncontrolling equity investment on the deconsolidation date. Statement 160
      also
      includes expanded disclosure requirements regarding the interests of the parent
      and its noncontrolling interest.





Statement
      160 is effective for fiscal years, and interim periods within those fiscal
      years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
      The Company believes adoption of this standard will not have an impact on the
      financial condition or the results of the Company’s operations.





On
      April
      21, 2008, the FASB posted a revised FASB Statement No. 133 Implementation
      guidance for Issues I1, Interaction of the Disclosure Requirements of Statement
      133 and Statement 47, and K4, Miscellaneous: Income Statement Classification
      of
      Hedge Ineffectiveness and the Component of a Derivative's Gain or Loss Excluded
      from the Assessment of Hedge Effectiveness. The revisions relate to the issuance
      of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging
      Activities. The Company believes adoption of this standard will not have a
      material impact on the financial condition or the results of the Company’s
      operations.





The
      FASB
      has issued FASB Statement No. 162, *The
      Hierarchy of Generally Accepted Accounting Principles.* Statement 162 is intended to improve financial reporting by identifying a
      consistent framework, or hierarchy, for selecting accounting principles to
      be
      used in preparing financial statements that are presented in conformity with
      U.S. generally accepted accounting principles for nongovernmental entities.
      The
      hierarchy under Statement 162 is as follows:





*
      FASB
      Statements of Financial Accounting Standards and Interpretations, FASB Statement
      133 Implementation Issues, FASB Staff Positions, AICPA Accounting Research
      Bulletins and Accounting Principles Board Opinions that are not superseded
      by
      actions of the FASB, and Rules and interpretive releases of the SEC for SEC
      registrants.





*
      FASB
      Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
      Accounting Guides and Statements of Position.





*
      AICPA
      Accounting Standards Executive Committee Practice Bulletins that have been
      cleared by the FASB, consensus positions of the EITF, and Appendix D EITF
      topics.





Statement
      162 is effective 60 days following the SEC's approval of the PCAOB amendments
      to
      AU Section 411, *The
      Meaning of Present Fairly in Conformity with Generally Accepted Accounting
      Principles.* Since
      Statement 162 is only effective for nongovernmental entities, the GAAP hierarchy
      will remain in AICPA Statement on Auditing Standards (SAS) No. 69, *The
      Meaning of "Present Fairly in Conformity with Generally Accepted Accounting
      Principles" in the Independent Auditor's Report,* for
      state and local governmental entities and federal governmental entities. The
      Company believes the adoption of this standard will not have a material impact
      on the financial condition or the results of the Company’s
      operations.




F-18


The
      FASB
      issued FASB Statement No. 163, *Accounting
      for Financial Guarantee Insurance Contracts.* This new
      standard clarifies how FASB Statement No. 60, *Accounting
      and Reporting by Insurance Enterprises,* applies
      to financial guarantee insurance contracts issued by insurance enterprises,
      including the recognition and measurement of premium revenue and claim
      liabilities. It also requires expanded disclosures about financial guarantee
      insurance contracts.





Statement
      163 is effective for financial statements issued for fiscal years beginning
      after December 15, 2008, and all interim periods within those fiscal years,
      except for disclosures about the insurance enterprise's risk-management
      activities, which are effective the first period (including interim periods)
      beginning after May 23, 2008. Except for the required disclosures, earlier
      application is not permitted. The Company believes the adoption of this standard
      will not have an impact on the financial condition or the results of the
      Company’s operations.




NOTE
      3 -
      Marketable Securities





Marketable
      securities are classified as current assets and are summarized as
      follows:





(in thousands)July 31,
              2008
            
            July 31,
              2007Marketable
                equity securities, at cost
            
            $
            50
            
            $
            50Marketable
                equity securities, at fair value
              (See
                Notes 12 & 14)
            
            $
            65
            
            $
            90





NOTE
      4 –
Material and Supplies Inventories





(in thousands)July 31,
              2008
            
            July 31,
              2007Materials, supplies and other
            
            $
            936
            
            $
            174Total
            
            $
            936
            
            $
            174




NOTE
      5 -
      Ore on Leach Pads and Inventories (“In-Process Inventory”)




(in thousands)July 31,
              2008
            
            July 31,
              2007Ore
                on leach pads
            
            $
            12,176
            
            $
            2,996Total
            
            $
            12,176
            
            $
            2,996




Costs
      that are incurred in or benefit the productive process are accumulated as ore
      on
      leach pads and inventories. Ore on leach pads and inventories are carried at
      the
      lower of average cost or net realizable value. Net realizable value represents
      the estimated future sales price of the product based on current and long-term
      metals prices, less the estimated costs to complete production and bring the
      product to sale. Write-downs of ore on leach pads and inventories, resulting
      from net realizable value impairments, will be reported as a component of *Costs
      applicable to sales* .
      The
      current portion of ore on leach pads and inventories is determined based on
      the
      expected amounts to be processed within the next 12 months. Ore on leach pads
      and inventories not expected to be processed within the next 12 months will
      be classified as long-term.




F-19


NOTE
      6 –
Deposits





Deposits
      are classified as current assets and represent payments made on mining equipment
      and contract for the Company’s El Chanate Project in Sonora, Mexico. Deposits
      are summarized as follows:





(in thousands)July 31,
              2008
            
            July 31,
              2007Advance
                payment on Mining Contract to Sinergia (Note 18)
            
            $
            -
            
            $
            683Equipment
                deposit
            
            
            9
            
            
            193Other
            
            
            -
            
            
            3Total
                Deposits
            
            $
            9
            
            $
            879





NOTE
      7 –
Other Current Assets





Other
      current assets consist of the following:





(in thousands)July 31,
              2008
            
            July 31,
              2007Value added
                tax to be refunded
            
            $
            425
            
            $
            1,475Asset
                held for resale
            
            
            -
            
            
            166Other
            
            
            65
            
            
            34Total
                Other Current Assets
            
            $
            490
            
            $
            1,675





NOTE
      8 –
Property and Equipment





Property
      and Equipment consist of the following:





(in thousands)July 31,
              2008
            
            July 31,
              2007Process equipment
                and facilities
            
            $
            20,182
            
            $
            16,285Asset
                retirement obligation
            
            
            1,511
            
            
            1,218Mining
                equipment
            
            
            974
            
            
            863Mineral properties
            
            
            141
            
            
            141Construction
                in progress
            
            
            1,277
            
            
            -Computer
                and office equipment
            
            
            316
            
            
            212Improvements
            
            
            16
            
            
            16Furniture
            
            
            38
            
            
            23Total
            
            
            24,455
            
            
            18,758Less:
                accumulated depreciation
            
            
            (3,537
            )
            
            (758
            )Property
                and equipment, net
            
            $
            20,918
            
            $
            18,000





Depreciation
      expense for the year ended July 31, 2008 and 2007 was approximately $2,779
      and
      $720, respectively.




F-20


NOTE
      9 -
      Intangible Assets





Intangible
      assets consist of the following:


(in thousands)July 31,
                2008
              
              July31,
                2007Repurchase
                  of Net Profits Interest
              
              $
              500
              
              $
              500Water
                  Rights
              
              
              134
              
              
              -Mobilization
                  Payment to Mineral Contractor
              
              
              70
              
              
              70Investment
                  in Right of Way
              
              
              18
              
              
              18Total
              
              
              722
              
              
              588Accumulated
                  Amortization
              
              
              (541
              )
              
              (11
              )Intangible
                  assets, net
              
              $
              181
              
              $
              577


Purchased intangible
      assets consisting of rights of way, water rights, easements and net profit
      interests are carried at cost less accumulated amortization. Amortization is
      computed using the straight-line method over the economic lives of the
      respective assets, generally five years or using the UOP method. It is the
      Company’s policy to assess periodically the carrying amount of its purchased
      intangible assets to determine if there has been an impairment to their carrying
      value. Impairments of other intangible assets are determined in accordance
      with
      SFAS 144. There was no impairment at July 31, 2008.





On
      September 13, 2006, the Company repurchased the 5% net profits interest formerly
      held by Grupo Minera FG (“FG”), and subsequently acquired by Daniel Gutierrez
      Cibrian, with respect to the operations at the El Chanate mine. That net profits
      interest had originally been granted to FG in connection with the April 2004
      termination of the joint venture agreement between FG and MSR, the Company’s
      wholly owned Mexican subsidiary. FG also received a right of first refusal
      to
      carry out the works and render construction services required to effectuate
      the
      El Chanate Project. This right of first refusal is not applicable where a
      funding source for the project determines that others should render such works
      or services. FG has assigned or otherwise transferred to MSR all permits,
      licenses, consents and authorizations (collectively, “authorizations”) for which
      FG had obtained in its name in connection with the development of the El Chanate
      Project to the extent that the authorizations are assignable. To the extent
      that
      the authorizations are not assignable or otherwise transferable, FG has given
      its consent for the authorizations to be cancelled so that they can be re-issued
      or re-granted in MSR’s name. The foregoing has been completed. The purchase
      price for the buyback of the net profits interest was $500,000, and was
      structured as part of the project costs financed by the loan agreement with
      Standard Bank, Plc. (See Note 17). Mr. Cibrian retained a 1% net profits
      interest in MSR, payable only after a total US $20 million in net profits has
      been generated from operations at El Chanate. The Company recorded this
      transaction on its balance sheet as an intangible asset under guidance provided
      by FAS 142 – *Goodwill
      and Other Intangible Assets* to be
      amortized over the period of which the asset is expected to contribute directly
      or indirectly to the Company’s cash flow. On March 23, 2007, The Company
      reacquired the remaining 1% net profits interest (see Note 18).





The
      Right
      of Way and the Mobilization Payment were recorded at cost and are being
      amortized using the units of production method. Amortization expense for the
      year ended July 31, 2008 and 2007 was approximately $530 and $7, respectively.
      The Repurchase of Net Profits Interest from FG was fully amortized as of July
      31, 2008.


F-21


NOTE
      10 -
      Mining Reclamation Bonds





These
      represent certificates of deposit that have been deposited as security for
      Mining Reclamation Bonds in Colorado. They bear interest at rates varying from
      4.35% to 5.01% annually and mature at various dates through 2010.





NOTE
      11 -
      Mining Concessions





Mining
      concessions consists of the following:





(in
                thousands)July
                31,
              2008
            
            July
                31,
              2007El
                Chanate
            
            $
            45
            
            $
            45El
                Charro
            
            
            25
            
            
            25Total
            
            
            70
            
            
            70Less:
                accumulated amortization
            
            
            (11
            )
            
            (3
            )Total
            
            $
            59
            
            $
            67





The
      El
      Chanate concessions are carried at historical cost and are being amortized
      using
      the units of production method. They were acquired in connection with the
      purchase of the stock of Minera Chanate (see Note 1). Amortization expense
      for
      the year ended July 31, 2008 and 2007 was approximately $8 and $3, respectively.




MSR
      acquired an additional mining concession – El Charro. El Charro lies within the
      current El Chanate property boundaries. MSR is required to pay 1 1/2% net
      smelter royalty in connection with the El Charro concession.





NOTE
      12 -
      Loans Receivable - Affiliate





Loans
      receivable - affiliate consist of expense reimbursements due from a
      publicly-owned corporation in which the Company has an investment. The Company's
      president and chairman of the board of directors was an officer and director
      of
      that corporation. On
      March
      10, 2008, the Company’s president and chairman of the board of directors
      resigned as both an officer and director of this corporation. These
      loans are non-interest bearing and due on demand (see Note 3 &
14).




NOTE
      13 -
      Reclamations and Remediation Liabilities (“Asset Retirement
      Obligations”)




Reclamation
      costs are allocated to expense over the life of the related assets and are
      periodically adjusted to reflect changes in the estimated present value
      resulting from the passage of time and revisions to the estimates of either
      the
      timing or amount of the reclamation and abandonment costs. The Asset Retirement
      Obligation is based on when the spending for an existing environmental
      disturbance and activity to date will occur. The Company reviews, on an annual
      basis, unless otherwise deemed necessary, the Asset Retirement Obligation at
      each mine site. The Company reviewed the estimated present value of the El
      Chanate mine reclamation and abandonment costs as of July 31, 2008. This review
      resulted in an increase in the Asset Retirement Obligation by approximately
      $293. As of July 31, 2008 and 2007, approximately $1,666 and $1,249,
      respectively, was accrued for reclamation obligations relating to mineral
      properties in accordance with SFAS No. 143, “Accounting for Asset
      Retirement Obligations.”




The
      following is a reconciliation of the liability for long-term Asset Retirement
      Obligations for the years ended July 31, 2008 and 2007:




F-22




(in
                thousands)Balance
                as of July 31, 2006
            
            $
            -Additions,
                changes in estimates and other
            
            
            1,218Liabilities
                settled
            
            
            -Accretion
                expense
            
            
            31Balance
                as of July 31, 2007
            
            $
            1,249Additions,
                changes in estimates and other
            
            
            293Liabilities
                settled
            
            
            -Accretion
                expense
            
            
            124Balance
                as of July 31, 2008
            
            $
            1,666





NOTE
      14 -
      Other Comprehensive Income (Loss)-Supplemental Non-Cash Investing
      Activities





Other
      comprehensive income (loss) consists of accumulated foreign translation gains
      and losses and unrealized gains and losses on marketable securities and
      derivatives is summarized as follows:





(in
                thousands)Balance
                as of July 31, 2006
            
            $
            146Change
                in fair value of derivative instrument
            
            
            (47
            )Equity
                Adjustments from Foreign Currency Translation
            
            
            205Unrealized
                Gains (loss) on Marketable Securities
            
            
            -Balance
                as of July 31, 2007
            
            $
            304Change
                in fair value of derivative instrument
            
            
            (141
            )Equity
                Adjustments from Foreign Currency Translation
            
            
            756Unrealized
                Gains (loss) on Marketable Securities
            
            
            (25
            )Balance
                as of July 31, 2008
            
            $
            894





NOTE
      15 -
      Related Party Transactions





In
      August
      2002, the Company purchased marketable equity securities of a related company.
      The Company recorded approximately $6 and $9 in expense reimbursements including
      office rent from this entity for the year ended July 31, 2008 and 2007,
      respectively (see Notes 3 and 12).





The
      Company utilizes a Mexican Corporation 100% owned by two officers/Directors
      and
      stockholders of the Company for mining support services. These services include
      but are not limited to the payment of mining salaries and related costs. The
      Mexican Corporation bills the Company for these services at cost. Mining
      expenses charged by the Mexican Corporation and eliminated upon consolidation
      amounted to approximately $3,775 and $702 for the year ended July 31, 2008
      and
      2007, respectively.





During
      the years ended July 31, 2008 and 2007, the Company paid its former V.P.
      Exploration and Director consulting fees of $100,000 and $0, respectively.
      In
      addition, this individual earned wages of $120,000 during the year ended July
      31, 2007. Also, during the year ended July 31, 2008 and 2007, the Company paid
      a
      director legal and consulting fees of $35,000 and $24,000,
      respectively. ****





In
      January 2006, the Company extended the following stock options through January
      3, 2007, all of which are exercisable at $0.05 per share: Chief Executive
      Officer and Director – 1,250,000 shares; Director – 500,000 shares; V.P.
      Investor Relations and Director – 327,727 shares; V.P. Development and Director
– 500,000 shares; and V.P. Mine Development – 25,000 shares. There
      was
      not a material increase in the intrinsic value of these options at the date
      of
      modification as compared to the intrinsic value of the original issuance of
      these stock options on the applicable measurement date. All of these options
      were exercised prior to their extended expiration.





F-23


On
      February 7, 2007, Robert Roningen resigned as the Company’s Secretary and, on
      February 9, 2007, John Brownlie, the Company’s Vice President of Operations, was
      appointed Chief Operating Officer and Jeffrey W. Pritchard, the Company’s Vice
      President of Investor Relations, was appointed Secretary.




NOTE
      16 -
      Stockholders' Equity





Common
      Stock




The
      Company issued 1,150,000 shares of common stock and 12,600,000 common stock
      purchase warrants to Standard Bank as part of a commitment fee to entering
      into
      the credit facility on August 15, 2006, with its wholly-owned subsidiaries
      MSR
      and Oro. The Company recorded the issuance of the 1,150,000 shares of common
      stock and 12,600,000 warrants as deferred financing costs of approximately
      $351
      and $3,314, respectively, as a reduction of stockholders' equity on the
      Company's balance sheet. The issuance of 1,150,000 shares was recorded at the
      fair market value of the Company's common stock at the closing date or $0.305
      per share. The warrants were valued at approximately $3,314 using the
      Black-Scholes option pricing model and were reflected as deferred financing
      costs as a reduction of stockholders' equity on the Company’s balance sheet (See
      Note 18). The balance of deferred financing costs, net of amortization, as
      of
      July 31, 2008 and 2007, as a reduction of stockholders' equity, was
      approximately $2,611 and $3,438. Amortization expense for the year ended July
      31, 2008 and 2007, was approximately $931 and $750, respectively.





The
      Company closed two private placements in January 2007 pursuant to which it
      issued an aggregate of 12,561,667 units, each unit consisting of one share
      of
      its common stock and a warrant to purchase 1⁄4 of a share of its common stock at
      $0.30 per share for proceeds of approximately $3,486, net of commissions of
      approximately $283. The Warrant issued to each purchaser in the January 2007
      placements is exercisable for one share of common stock, at an exercise price
      equal to $0.40 per share. Each Warrant has a term of eighteen months and is
      fully exercisable from the date of issuance. The Company issued to the placement
      agents eighteen month warrants to purchase up to an aggregate of 942,125 shares
      of common stock at an exercise price of $0.30 per share. Such placement agent
      warrants are valued at approximately $142 using the Black-Scholes option pricing
      method.





The
      Company also received proceeds of approximately $7,473 and $5,643 during the
      years ended July 31, 2008 and 2007, from the exercising of an aggregate of
      22,994,178 and 22,203,909 of warrants and options, respectively, issued to
      investors in past private placements, to officers and directors as well as
      to
      outside parties for services rendered.





On
      March
      22, 2007, the Company issued 500,000 shares of common stock to John Brownlie,
      the Company’s Chief Operating Officer under the Company’s 2006 Equity Incentive
      Plan. The fair value of the services provided in March 2007 amounted to $225
      or
      $0.45 per share.





In
      March
      2007, the Company issued 65,625 shares of common stock to an independent
      contractor for services provided related to the Company’s El Chanate project.
      The fair value of the services provided amounted to $26 or $0.40 per share.
      In
      April 2007, this independent contractor was engaged as the general manager
      of
      the Company’s El Chanate project for a six month term with an option for an
      additional six month term, if mutually agreed upon by both parties. Pursuant
      to
      the agreement, the Company issued 113,636 shares of common stock with a fair
      value of $50 or $0.44 per share at the fair market value of the Company’s common
      stock on the date of the agreement. The issuance of these shares vest over
      the
      six-month term. The independent contractor and the Company mutually agreed
      to
      terminate the contractor after three months as construction was complete. The
      Company issued 56,818 shares of the Company’s common stock on the vested portion
      of the 113,636 shares or 50%.




F-24


On
      December 20, 2007, at the recommendation of the Compensation Committee of the
      Board of Directors, the Company’s executive officers, directors and employees
      were granted 1,095,000 restricted shares under our 2006 Equity Incentive Plan
      (the “Plan”). The restricted shares granted vest equally over three years from
      the date of grant. The fair value of the Company’s stock was $0.63 on the date
      of grant resulting in the Company recording approximately $690 in deferred
      compensation cost. For the year ended July 31, 2008, the Company has recorded
      approximately $194 in equity compensation expense upon the vesting of a portion
      of restricted shares.





On
      July
      17, 2008, at the recommendation of the Compensation Committee of the Board
      of
      Directors, the Company’s executive officers and directors were granted 515,000
      shares under our 2006 Equity Incentive Plan. The restricted shares granted
      vested immediately. The fair value of the Company’s stock was $0.70 on the date
      of grant resulting in the Company recording approximately $361 in equity
      compensation expense.





Recapitalization





In
      February 2007, the Company's Certificate of Incorporation was amended to
      increase the Company's authorized shares of capital stock from 200,000,000
      to
      250,000,000 shares. In January 2008, the Company amended its Certificate of
      Incorporation to increase the Company’s authorized shares of capital stock from
      250,000,000 to 300,000,000 shares.





Warrants
      and Options





On
      November 30, 2006, the Company’s board of directors granted 100,000 common stock
      options to each of John Postle, Ian A. Shaw and Mark T. Nesbitt, the Company’s
      independent directors. The options are to purchase shares of the Company’s
      common stock at an exercise price of $0.33 per share (the closing price of
      its
      common stock on that date) for a period of two years. The Company utilized
      the
      Black-Scholes method to fair value the 300,000 options received by the directors
      and recorded approximately $40 as equity based compensation
      expense.





On
      December 13, 2006, the Company issued two year options to purchase the Company’s
      common stock at an exercise price of $0.36 per share to its Chief Operating
      Officer, Chief Financial Officer and the Company’s Canadian counsel. These
      options are for the purchase of 250,000 shares, 100,000 shares and 100,000
      shares, respectively.  The
      Company utilized the Black-Scholes method to fair value the 450,000 options
      received by these individuals and recorded approximately $61 as stock based
      compensation expense.





On
      March
      22, 2007, the Company issued two year options to purchase the Company’s common
      stock at an exercise price of $0.45 per share to the Company’s SEC Counsel.
      These options are for the purchase of 100,000 shares and were issued under
      the
      2006 Equity-Incentive Plan. The Company utilized the Black-Scholes Method to
      fair value these options and recorded approximately $15 as equity based
      compensation expense.





On
      June
      13, 2007, the Company issued two year options to purchase the Company’s common
      stock at an exercise price of $0.384 per share to the Company’s CFO. These
      options are for the purchase of 500,000 shares and were issued under the 2006
      Equity-Incentive Plan. The Company utilized the Black-Scholes Method to fair
      value these options and recorded approximately $65 as equity based compensation
      expense.





On
      August
      13, 2007, the Company issued two year options to purchase the Company’s common
      stock at an exercise price ranging from $0.43 to $0.50 per share to outside
      parties for services provided. These options are for the purchase of 465,000
      shares and were issued under the 2006 Equity-Incentive Plan. The Company
      utilized the Black-Scholes Method to fair value these options and recorded
      approximately $58 as equity based compensation expense.




F-25


On
      December 20 2007, at the recommendation of the Compensation Committee of the
      Board of Directors, the Company’s executive officers were granted 3,150,000
      stock options under our 2006 Equity Incentive Plan . The stock options have
      a
      term of seven years and vest as follows: 20% vested upon issuance and the
      balance vest 20% annually thereafter. The exercise price of the stock options
      is
      $0.63 per share (per the Plan, the closing price on the Toronto Stock Exchange
      on the trading day immediately prior to the day of determination converted
      to
      U.S. Dollars). In the event of a termination of continuous service (other than
      as a result of a change of control, as defined in the Plan, unvested stock
      options shall terminate and, with regard to vested stock options, the exercise
      period shall be the lesser of the original expiration date or one year from
      the
      date continuous service terminates. Upon the happening of a change of control,
      all unvested stock options and unvested restricted stock grants immediately
      vest.The
      Company utilized the Black-Scholes method to fair value the 3,150,000 options
      received by these individuals totaling $1,060. For the year ended July 31,
      2008,
      the Company recorded approximately $375 in equity compensation expense on the
      vested portion of these stock options.





On
      July
      17, 2008, the Company closed in escrow pending execution of Mexican collateral
      documents and certain other ministerial matters an Amended And Restated Credit
      Agreement (the “Credit Agreement”) involving our wholly-owned Mexican
      subsidiaries Minera Santa Rita S. de R.L. de C.V. (“MSR”) and Oro de Altar S. de
      R.L. de C.V. (“Oro”), as borrowers (“Borrowers”), the Company, as guarantor, and
      Standard Bank PLC (“Standard Bank”), as the lender., Pursuant to the Credit
      Agreement the Company agreed to issue to Standard Bank a two year warrant to
      purchase an aggregate of 600,000 shares of our common stock at an exercise
      price
      of $0.852 per share. The warrants were valued at approximately $103 using the
      Black-Scholes option pricing model and were reflected as deferred financing
      costs as a reduction of stockholders' equity on the Company’s balance sheet as
      of July 31, 2008 (See Note 17).





2006
      Equity Incentive Plan





The
      2006
      Equity Incentive Plan (the “Plan”), approved by stockholders on February 21,
      2007, is intended to attract and retain individuals of experience and ability,
      to provide incentive to the Company’s employees, consultants, and non-employee
      directors, to encourage employee and director proprietary interests in the
      Company, and to encourage employees to remain in the Company’s employ.





The
      Plan
      authorizes the grant of non-qualified and incentive stock options, stock
      appreciation rights and restricted stock awards (each, an “Award”). A maximum of
      10,000,000 shares of common stock are reserved for potential issuance pursuant
      to Awards under the Plan. Unless sooner terminated, the Plan will continue
      in
      effect for a period of 10 years from its effective date.





The
      Plan
      is administered by the Company’s Board of Directors which has delegated the
      administration to the Company’s Compensation Committee. The Plan provides for
      Awards to be made to such of the Company’s employees, directors and consultants
      and its affiliates as the Board may select.





Stock
      options awarded under the Plan may vest and be exercisable at such times (not
      later than 10 years after the date of grant) and at such exercise prices (not
      less than Fair Market Value at the date of grant) as the Board may determine.
      Unless otherwise determined by the Board, stock options shall not be
      transferable except by will or by the laws of descent and distribution. The
      Board may provide for options to become immediately exercisable upon a "change
      in control," as defined in the Plan.





The
      exercise price of an option must be paid in cash. No options may be granted
      under the Plan after the tenth anniversary of its effective date. Unless the
      Board determines otherwise, there are certain continuous service requirements
      and the options are not transferable.




F-26


The
      Plan
      provides the Board with the general power to amend the Plan, or any portion
      thereof at any time in any respect without the approval of the Company’s
      stockholders, provided however, that the stockholders must approve any amendment
      which increases the fixed maximum percentage of shares of common stock issuable
      pursuant to the Plan, reduces the exercise price of an Award held by a director,
      officer or ten percent stockholder or extends the term of an Award held by
      a
      director, officer or ten percent stockholder. Notwithstanding the foregoing,
      stockholder approval may still be necessary to satisfy the requirements of
      Section 422 of the Code, Rule 16b-3 of the Securities Exchange Act of 1934,
      as
      amended or any applicable stock exchange listing requirements. The Board may
      amend the Plan in any respect it deems necessary or advisable to provide
      eligible Employees with the maximum benefits provided or to be provided under
      the provisions of the Code and the regulations promulgated thereunder relating
      to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock
      Options granted under it into compliance therewith. Rights under any Award
      granted before amendment of the Plan cannot be impaired by any amendment of
      the
      Plan unless the Participant consents in writing. The Board is empowered to
      amend
      the terms of any one or more Awards; provided, however, that the rights under
      any Award shall not be impaired by any such amendment unless the applicable
      Participant consents in writing and further provided that the Board cannot
      amend
      the exercise price of an option, the Fair Market Value of an Award or extend
      the
      term of an option or Award without obtaining the approval of the stockholders
      if
      required by the rules of the TSX or any stock exchange upon which the common
      stock is listed.


F-27




Information
      regarding the options approved by the Compensation Committee under the Equity
      Incentive Plan for the fiscal years ended July 31, 2008 and 2007 is summarized
      below:





2007
            
            2008Shares
            
            Option
              Price
            
            Weighted
              Average
              Exercise
              Price
            
            Shares
            
            Option
              Price
            
            Weighted
              Average
              Exercise
              PriceOutstanding beginning at year
            
            
            -
            
            $
            -
            
            $
            -
            
            
            1,050,000
            
            $
            0.36-0.45
            
            $
            0.38Granted
            
            
            1,050,000
            
            
            0.36-0.45
            
            
            0.38
            
            
            3,615,000
            
            
            0.38-0.63
            
            $
            0.61Canceled
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                end of year
            
            
            1,050,000
            
            $
            0.36-0.45
            
            $
            0.38
            
            
            4,665,000
            
            $
            0.36-0.63
            
            $
            0.56Exercisable
            
            
            1,050,000
            
            $
            0.36-0.45
            
            $
            0.38
            
            
            3,360,000
            
            $
            0.36-0.63
            
            $
            0.54Weighted
                average remaining contractual life (years)
            
            
            1-2
                years
            
            
            -
            
            
            -
            
            
            5-6
                years
            
            
            -
            
            
            -Available
                for future grants
            
            
            8,450,000
            
            
            -
            
            
            -
            
            
            3,225,000
            
            
            -
            
            
            -





Restricted
      stock awards granted by the Compensation Committee under the Equity Incentive
      Plan for the fiscal years ended July 31, 2008 and 2007, were 500,000 and
      1,610,000 shares, respectively.





NOTE
      17 -
      Debt





Long
                term debt consists of the following:
            
            (in
                thousands)July
                31,
              2008
            
            July
                31,
              2007Total
                long-term debt
            
            $
            12,500
            
            $
            12,500Less
                current portion
            
            
            4,125
            
            
            -Long-term
                debt
            
            $
            8,375
            
            $
            12,500





On
      August
      15, 2006, the Company entered into a credit facility (the “Credit Facility”)
      involving its wholly-owned subsidiaries MSR and Oro, as borrowers, us, as
      guarantor, and Standard Bank plc (“Standard Bank”), as the lender and the
      offshore account holder. Under the Credit Facility, MSR and Oro have agreed
      to
      borrow money in an aggregate principal amount of up to US$12.5 million (the
      “Loan”) for the purpose of constructing, developing and operating the Company’s
      El Chanate Project (the “Mine”). The Company is guaranteeing the repayment of
      the loan and the performance of the obligations under the Credit Facility.
      The
      Loan is scheduled to be repaid in fourteen quarterly payments with the first
      principal payment having been made on September 30, 2008. The Loan bears
      interest at LIBOR plus 4.00%, with LIBOR interest periods of 1, 2, 3 or 6 months
      and with interest payable at the end of the applicable interest period. As
      of
      July 31, 2007, the outstanding amount on the credit facility was $12,500 and
      accrued interest on this facility was approximately $100.





F-28




Approximate
      future principal payments under this loan are as follows (in
      thousands):





Fiscal
                Years Ending July 31,2009
            
            $
            4,1252010
            
            
            3,1252011
            
            
            3,5002012
            
            
            1,750$
            12,500




The
      Credit Facility contains covenants customary for a project financing loan,
      including but not limited to restrictions (subject to certain exceptions) on
      incurring additional debt, creating liens on its property, disposing of any
      assets, merging with other companies and making any investments. The Company
      is
      required to meet and maintain certain financial covenants, including (i) a
      debt
      service coverage ratio of not less than 1.2 to 1.0, (ii) a projected debt
      service coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage
      ratio of at least 1.6 to 1.0, (iv) a project life coverage ratio of at least
      2.0
      to 1.0 and (v) a minimum reserve tail. The Company also is required to maintain
      a certain minimum level of unrestricted cash, and upon meeting certain Mine
      start-up production and performance criteria, MSR and Oro are required to
      maintain a specified amount of cash as a reserve for debt repayment. As of
      July
      31, 2008, the Company was in compliance with these financial covenants.





The
      Loan
      is secured by all of the tangible and intangible assets and property owned
      by
      MSR and Oro pursuant to the terms of a Mortgage Agreement, a Non-Possessory
      Pledge Agreement, an Account Pledge Agreement and certain other agreements
      entered into in Mexico (the “Mexican Collateral Documents”). As additional
      collateral for the Loan, the Company, together with its subsidiary, Leadville
      Mining & Milling Holding Corporation, have pledged all of its ownership
      interest in MSR and Oro. In addition to these collateral arrangements, MSR
      and
      Oro are required to deposit all proceeds of the Loan and all cash proceeds
      received from operations and other sources in an offshore, controlled account
      with Standard Bank. Absent a default under the loan documents, MSR and Oro
      may
      use the funds from this account for specific purposes such as approved project
      costs and operating costs.





As
      part
      of the fee for entering into and closing the Credit Facility, the Company issued
      to Standard Bank 1,150,000 shares of its restricted common stock and a warrant
      for the purchase of 12,600,000 shares of its common stock at an exercise price
      of $0.317 per share, expiring on the earlier of (a) December 31, 2010 or (b)
      the
      date one year after the repayment of the Credit Facility. Previously, pursuant
      to the mandate and commitment letter for the facility, the Company issued to
      Standard Bank 1,000,000 shares of its restricted common stock and a warrant
      for
      the purchase of 1,000,000 shares of its common stock at an exercise price of
      $0.32 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
      date one year after the repayment of the Credit Facility. The Company recorded
      the issuance of the 1,000,000 shares of common stock as deferred financing
      costs
      of approximately $270 as a reduction of stockholders' equity on its balance
      sheet. The issuance of these shares was recorded at the fair market value of
      the
      Company’s common stock at the commitment letter date or $0.27 per share. In
      addition, the warrants were valued at approximately $253,000 using the
      Black-Scholes option pricing model and were reflected as deferred financing
      costs as a reduction of stockholders' equity on the Company’s balance sheet in
      2006. The Company registered for public resale the 2,150,000 shares issued
      to
      Standard Bank and the 13,600,000 shares issuable upon exercise of warrants
      issued to Standard Bank. ****





In
      March
      2006, The Company entered into a gold price protection arrangement to protect
      it
      against future fluctuations in the price of gold and interest rate swap
      agreements in October 2006 in accordance with the terms of the Credit Facility
      both with Standard Bank (See Note 20 for more details on these transactions).




F-29




On
      July
      17, 2008, the Company closed in escrow pending execution of Mexican collateral
      documents and certain other ministerial matters an Amended And Restated Credit
      Agreement (the “Credit Agreement”) involving our wholly-owned Mexican
      subsidiaries MSR and Oro, as borrowers (“Borrowers”), the Company, as guarantor,
      and Standard Bank PLC (“Standard Bank”), as the lender. The Credit Agreement
      amends and restates the prior credit agreement between the parties dated August
      15, 2006 (the “Original Agreement”). Under the Original Agreement, MSR and Oro
      could borrow, and did borrow, money in an aggregate principal amount of up
      to
      US$12,500,000 (the “Term Loan”) for the purpose of constructing, developing and
      operating the El Chanate gold mining project in Sonora State, Mexico. The
      Company guaranteed the repayment of the Term Loan and the performance of the
      obligations under the Original Agreement.





The
      Credit Agreement establishes a new senior secured revolving credit facility
      that
      permits the Borrowers to borrow up to $5,000,000 during the one year period
      after the closing of the Credit Agreement. The Borrowers may request a borrowing
      of the Revolving Commitment from time to time, provided that the Borrowers
      are
      not entitled to request a borrowing more than once in any calendar month (each
      borrowing a “Revolving Loan”). Repayment of the Revolving Loans will be secured
      and guaranteed in the same manner as the Term Loan. Term Loan principal shall
      be
      repaid quarterly commencing on September 30, 2008 and consisting of four
      payments in the amount of $1,125,000, followed by eight payments in the amount
      of $900,000 and two final payments in the amount of $400,000. There is no
      prepayment fee. Principal under the Term Loan and the Revolving Loans shall
      bear
      interest at a rate per annum equal to the LIBO Rate, as defined in the Credit
      Agreement, for the applicable Interest Period plus the Applicable Margin. An
      Interest Period can be one, two, three or six months, at the option of the
      Borrowers. The Applicable Margin for the Term Loan and the Revolving Loans
      is
      2.5% per annum and 2.0% per annum, respectively. The Borrowers are required
      to
      pay a commitment fee in respect of the Revolving Commitment at the rate of
      1.5%
      per annum on the average daily unused portion of the Revolving Commitment.
      Pursuant to the terms of the Original Credit Agreement, Standard Bank exercised
      significant control over the operating accounts of MSR located in Mexico and
      in
      the United States. Standard Bank’s control over the accounts has been lifted
      significantly under the terms of the Credit Agreement, giving the Borrowers
      authority to exercise primary day-to-day control over the accounts. However,
      the
      accounts remain subject to an account pledge agreement between MSR and the
      Lender.





In
      connection with the refinance proceedings, the Borrowers, as a condition
      precedent to closing, obtained a waiver letter from the Lender of any default
      or
      event of default as a result of not being in compliance with regulations of
      Mexican federal law with regard to certain filing and environmental bonding
      issues in connection with the operation of mining the El Chanate concessions
      as
      well as certain insurance requirements. The Borrowers have not yet complied
      with
      these regulations due to the absence of professionals in the area qualified
      to
      conduct studies to facilitate compliance. The Borrowers have agreed to make
      a
      commercially reasonable effort to come into compliance with these requirements.
      See also Note 25 “Subsequent Events”.





NOTE
      18 –
Mining, Engineering and Supply Contracts





In
      early
      December 2005, the Company’s wholly-owned Mexican subsidiary, MSR, which holds
      the rights to develop and mine El Chanate Project, entered into a Mining
      Contract with a Mexican mining contractor, Sinergia Obras Civiles y Mineras,
      S.A. de C.V,("Sinergia"). The Mining Contract becomes effective if and when
      MSR
      sends the Contractor a formal "Notice of Award".




F-30




On
      August
      2, 2006, the Company amended the November 24, 2005 Mining Contract between
      its
      subsidiary, MSR, and Sinergia. Pursuant to the amendment, MSR's right to deliver
      the Notice to Proceed to Sinergia was extended to November 1, 2006. Provided
      that this Notice was delivered to Sinergia on or before that date, with a
      specified date of commencement of the Work (as defined in the contract) not
      later than February 1, 2007, the mining rates set forth in the Mining Contract
      would still apply; subject to adjustment for the rate of inflation between
      September 23, 2005 and the date of commencement of the work. As
      consideration for these changes, the Company paid Sinergia $200,000 of the
      requisite advance payment discussed below. On November 1, 2006, MSR delivered
      the Notice of Award specifying January 25, 2007, as the date of commencement
      of
      Work. Based
      on
      a revised crushing and stacking plan and since MSR is placing the leach pad
      overliner material both Sinergia and MSR mutually agreed to delay mining until
      the end of March 2007. Mining of the El Chanate Project initiated on March
      25,
      2007.





Pursuant
      to the Mining Contract, Sinergia, using its own equipment, generally is
      performing all of the mining work (other than crushing) at the El Chanate
      Project for the life of the mine. MSR delivered to the Contractor a mobilization
      payment of $70,000 and the advance payment of $520,000. The advance payments
      are
      recoverable by MSR out of 100% of subsequent payments due to Sinergia under
      the
      Mining Contract. Pursuant to the Mining Contract, upon termination, Sinergia
      would be obligated to repay any portion of the advance payment that had not
      yet
      been recouped. Sinergia’s mining rates are subject to escalation on an annual
      basis. This escalation is tied to the percentage escalation in Sinergia’s costs
      for various parts for its equipment, interest rates and labor. One of the
      principals of Sinergia is one of the former principals of FG. FG was the
      Company’s former joint venture partner. As of July 31, 2008, the entire advance
      payment has been recovered by MSR.





On
      March
      23, 2007, The Company reacquired the remaining 1% net profits interest in its
      Mexican affiliate, MSR from one of the successors to FG (“FG’s Successor”). When
      the joint venture was terminated in March 2004, FG received, among other things,
      a participation certificate entitling it to receive 5% of the annual dividends
      of MSR, when declared. The participation certificate also gave FG the right
      to
      participate, but not to vote, in the meetings of MSR’s Board of Managers,
      Technical Committee and Partners. In August 2006, the Company repurchased the
      participation certificate from FG’s Successor for $500,000 with FG’s Successor
      retaining a 1% net profits interest in MSR, payable only after a total $20
      million in net profits has been generated from operations at El Chanate. The
      Company reacquired the remaining 1% net profits interest in consideration of
      its
      advancing $319,000 to Sinergia under the Mining Contract. FG’s Successor is a
      principal of Sinergia. As of July 31, 2008, the entire advance has been
      recovered.





NOTE
      19 -
      Employee and Consulting Agreements





The
      Company entered into employment agreements, effective July 31, 2006, with the
      following executive officers: Gifford A. Dieterle, President and Treasurer,
      Roger A. Newell, Vice President of Development, Jack V. Everett, Vice President
      of Exploration, and Jeffrey W. Pritchard, Vice President of Investor Relations.
      On December 5, 2006, effective January 1, 2007, The Company entered into an
      employment agreement with J. Scott Hazlitt, Vice President of Mine
      Development.





On
      June
      6, 2007, Jack V. Everett resigned as Vice President of Exploration and a
      Director of the Company and entered into a consulting agreement with the Company
      to provide mining and mineral exploration consultation services.





On
      September 10, 2007, Roger A. Newell resigned as Vice President of Development.
      He will continue to serve as a member of the Company’s Board of
      Directors.





The
      agreements run for a period of three years and automatically renew for
      successive one-year periods unless the Company or the executive provides the
      other party with written notice of their intent not to renew at least 30 days
      prior to the expiration of the then current employment period.




F-31




Mr.
      Dieterle is entitled to a base annual salary of at least $180,000, Mr. Hazlitt
      is entitled to a base annual salary of at least $125,000 and each of the other
      executives is entitled to a base annual salary of at least $120,000. Each
      executive is entitled to a bonus or salary increase in the sole discretion
      of
      the board of directors. In addition, Messrs. Dieterle, Newell, Everett and
      Pritchard each received two year options to purchase an aggregate of 250,000
      shares of the Company’s common stock at an exercise price of $0.32 per share
      (the closing price on July 31, 2006). These options have all been exercised.
      As
      discussed below, these agreements have been amended to provide for salary
      increases.





The
      Company has the right to terminate any executive’s employment for cause or on 30
      days’ prior written notice without cause or in the event of the executive’s
      disability (as defined in the agreements). The agreements automatically
      terminate upon an executive’s death. “Cause” is defined in the agreements as (1)
      a failure or refusal to perform the services required under the agreement;
      (2) a
      material breach by executive of any of the terms of the agreement; or (3)
      executive’s conviction of a crime that either results in imprisonment or
      involves embezzlement, dishonesty, or activities injurious to the Company’s
      reputation. In the event that the Company terminates an executive’s employment
      without cause or due to the disability of the executive, the executive will
      be
      entitled to a lump sum severance payment equal to one month’s salary, in the
      case of termination for disability, and up to 12 month’s salary (depending upon
      years of service), in the case of termination without cause.





Each
      executive has the right to terminate his employment agreement on 60 days’ prior
      written notice or, in the event of a material breach by the Company of any
      of
      the terms of the agreement, upon 30 days’ prior written notice. In the event of
      a claim of material breach by the Company of the agreement, the executive must
      specify the breach and its failure to either (i) cure or diligently commence
      to
      cure the breach within the 30 day notice period, or (ii) dispute in good faith
      the existence of the material breach. In the event that an agreement terminates
      due to the Company’s breach, the executive is entitled to severance payments in
      equal monthly installments beginning in the month following the executive’s
      termination equal to three month’ salary plus one additional month’s salary for
      each year of service to the Company. Severance payments cannot exceed 12 month’s
      salary.





In
      conjunction with the employment agreements, the Company’s board of directors
      deeming it essential to the best interests of its stockholders to foster the
      continuous engagement of key management personnel and recognizing that, as
      is
      the case with many publicly held corporations, a change of control might occur
      and that such possibility, and the uncertainty and questions which it might
      raise among management, might result in the departure or distraction of
      management personnel to the detriment of the company and its stockholders,
      determined to reinforce and encourage the continued attention and dedication
      of
      members of the Company’s management to their engagement without distraction in
      the face of potentially disturbing circumstances arising from the possibility
      of
      a change in control of the company, it entered into identical agreements
      regarding change in control with the executives. Each of the agreements
      regarding change in control continues through December 31, 2009 (December 31,
      2010 for Mr. Hazlitt) and extends automatically to the third anniversary thereof
      unless the Company gives notice to the executive prior to the date of such
      extension that the agreement term will not be extended. Notwithstanding the
      foregoing, if a change in control occurs during the term of the agreements,
      the
      term of the agreements will continue through the second anniversary of the
      date
      on which the change in control occurred. Each of the agreements entitles the
      executive to change of control benefits, as defined in the agreements and
      summarized below, upon his termination of employment with the Company during
      a
      potential change in control, as defined in the agreements, or after a change
      in
      control, as defined in the agreements, when his termination is caused (1) by
      the
      Company for any reason other than permanent disability or cause, as defined
      in
      the agreement (2) by the executive for good reason as defined in the agreements
      or, (3) by the executive for any reason during the 30 day period commencing
      on
      the first date which is six months after the date of the change in control.
      Each
      executive would receive a lump sum cash payment of three times his base salary
      and three times his bonus award from the prior year, as well as outplacement
      benefits. In addition, the exercise price of all Company options would decrease
      to $0.01 per share. Each agreement also provides that the executive is entitled
      to a payment to make him whole for any federal excise tax imposed on change
      of
      control or severance payments received by him.




F-32




On
      September 14, 2007, the Company entered into a Second Amended Engagement
      Agreement (the “Agreement”) with Christopher Chipman, the Company’s Chief
      Financial Officer, effective May 1, 2007. The Agreement supersedes and replaces
      Mr. Chipman’s prior agreement that expired on August 31, 2007. He receives a
      monthly fee of $14,583. The Agreement expires on August 31, 2009 and
      automatically renews for successive one-year periods, unless either party gives
      at least 30 days prior notice to the other party of its intent not to renew.
      Mr.
      Chipman can terminate the Agreement on 60 days prior notice. The Company can
      terminate the Agreement without cause on 30 days prior notice and for cause
      (as
      defined in the Agreement). The Agreement also terminates upon Mr. Chipman’s
      disability (as defined in the Agreement) or death. In the event that the Company
      terminates the Agreement without cause, Mr. Chipman will be entitled to a cash
      termination payment equal to his Annual Fee in effect upon the date of
      termination, payable in equal monthly installments beginning in the month
      following his termination. In the event the Agreement is terminated by Mr.
      Chipman at his election or due to his death or disability, Mr. Chipman will
      be
      entitled to the fees otherwise due and payable to him through the last day
      of
      the month in which such termination occurs. In conjunction with Agreement,
      the
      Company entered into a change of control agreement similar to the agreements
      entered into with the Company’s other executive officers. In connections with
      the original engagement agreement with Mr. Chipman in March 2006, Mr. Chipman
      received a two year option to purchase an aggregate of 50,000 shares of Company
      Common Stock at an exercise price of $.34 per share. This option has been
      exercised in full.





On
      May
      12, 2006, the Company entered into an employment agreement with John Brownlie,
      pursuant to which Mr. Brownlie originally served as Vice President Operations.
      Mr. Brownlie became our Chief Operating Officer in February 2007. Mr. Brownlie
      serves as Vice President Operations. Mr. Brownlie receives a base annual salary
      of $150,000 and is entitled to annual bonuses. Upon his employment, he received
      options to purchase an aggregate of 200,000 shares of the Company’s common stock
      at an exercise price of $.32 per share. 50,000 options vested immediately and
      the balance vest upon the Company achieving "Economic Completion" as that term
      is defined in the Standard Bank Credit Facility (when the Company has commenced
      mining operations and has been operating at anticipated capacity for 60 to
      90
      days). The term of the options is two years from the date of vesting. The
      agreement runs for an initial two year period, and automatically renews
      thereafter for additional one year periods unless terminated by either party
      within 30 days of a renewal date. The Company can terminate the agreement for
      cause or upon 30 days notice without cause. Mr. Brownlie can terminate the
      agreement upon 60 days notice without cause or, if there is a breach of the
      agreement by the Company that is not timely cured, upon 30 days notice. In
      the
      event that the Company terminates him without cause or he terminates due to
      the
      Company’s breach, he will be entitled to certain severance payments. The Company
      utilized the Black-Scholes method to fair value the 200,000 options received
      by
      Mr. Brownlie. The Company recorded approximately $70,000 as deferred
      compensation expense as of the date of the agreement and recorded the vested
      portion or $17,500 as stock based compensation expense for the year ended July
      31, 2006.





On
      August
      29, 2007, at the recommendation of the Compensation Committee, the Board
      increased the salaries of the Company’s executive officers to be commensurate
      with industry standards and amended their respective agreements accordingly.
      The
      new salaries were as follows: Gifford A. Dieterle, President, Treasurer and
      Chairman of the Board, $250,000; John Brownlie, Chief Operating Officer,
      $225,000; Christopher Chipman, Chief Financial Officer, $175,000 (consulting
      fee); Jeffrey W. Pritchard, Vice President - Investor Relations and Secretary,
      $195,000; Roger A. Newell, Vice President - Development, $135,000; and J. Scott
      Hazlitt, Vice President - Mine Development, $135,000. The salary increase for
      Mr. Brownlie and the consulting fee increase for Mr. Chipman were retroactive
      to
      May 1, 2007 and the salary increase for Mr. Pritchard is retroactive to August
      1, 2007.





On
      July
      17, 2008, at the recommendation of the Compensation Committee of our Board
      of
      Directors, our executive officers were awarded salary increases effective August
      1, 2008. The new salaries were as follows: Gifford A. Dieterle, President,
      Treasurer and Chairman of the Board, $287,500; John Brownlie, Chief Operating
      Officer, $258,750; Christopher Chipman, Chief Financial Officer, $201,250
      (consulting fee); Jeffrey W. Pritchard, Vice President - Investor Relations
      and
      Secretary, $224,250; and J. Scott Hazlitt, Vice President - Mine Development,
      $155,250.





F-33





NOTE
      20 -
      Sales Contracts, Commodity and Financial Instruments





In
      March
      2006, in conjunction with the Company’s credit facility, the Company entered
      into two identically structured derivative contracts with Standard Bank (See
      Note 15). Each derivative consisted of a series of forward sales of gold and
      a
      purchase gold cap. The Company agreed to sell a total volume of 121,927 ounces
      of gold forward to Standard Bank at a price of $500 per ounce on a quarterly
      basis during the period from March 2007 to September 2010. The Company also
      agreed to purchase a gold cap, enabling the company to buy gold on a quarterly
      basis during this same period and at identical volumes covering a total volume
      of 121,927 ounces of gold at a price of $535 per ounce. This combination of
      forward sales with purchased call options synthesizes a put position, which,
      in
      turn, serves to put a floor on the Company’s sales price. Critically, the volume
      of these derivative positions represents about 86 percent of current sales,
      such
      that these derivative positions serve only to mitigate the Company’s gold price
      risk, rather than eliminate or reverse the natural exposure of the Company.








Under
      FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
      Activities" ("SFAS 133"), these contracts must be carried on the balance sheet
      at their fair value. The Company records these changes in fair value and any
      cash settlements within Other Income or Expense. The contracts were not
      designated as hedging derivatives, and therefore special hedge accounting is
      not
      applied.




F-34




The
      following is a reconciliation of the derivative contracts regarding the
      Company’s Gold Price Protection agreement:





(in
                thousands)Asset
                balance as of July 31, 2006
            
            $
            (218
            )Loss
                on change in fair value of derivative
            
            
            1,225Net
                cash settlements
            
            
            (459
            )Liability
                balance as of July 31, 2007
            
            $
            548Loss
                on change in fair value of derivative
            
            
            1,359Net
                cash settlements
            
            
            (1,182
            )Liability
                balance as of July 31, 2008
            
            $
            725





Rather
      than modifying the original Gold Price Protection agreement with Standard Bank
      to satisfy these forward sale obligations, the Company has opted for a net
      cash
      settlement between the call option purchase price of $535 and the forward sale
      price of $500, or $35.00 per oz. Since inception, the Company has paid Standard
      Bank an aggregate of approximately $1,641,000 on the settlement of 46,883 ounces
      with corresponding reductions in the Company’s derivative liability
      ($1,181,000 or 25,329 ounces of gold for the fiscal year ended July 31, 2008).
      . These
      expenses were incurred concurrently with sales revenues that reflected actual
      sales of physical gold at market prices well above the option strike price
      of
      $535 per ounce. The remaining ounces to settle with regard to this agreement
      amounted to 75,044 as of July 31, 2008.




On
      October 11, 2006, prior to our initial draw on the Credit Facility, the Company
      entered into interest rate swap agreements in accordance with the terms of
      the
      Credit Facility. Although the Credit Facility requires that it hedge at least
      50% of its outstanding debt under this facility, the Company elected to cover
      $9,375,000 or 75% of the outstanding debt. The termination date on our existing
      swap position is December 31, 2010. However, the Company intends to use
      discretion in managing this risk as market conditions vary over time, allowing
      for the possibility of adjusting the degree of hedge coverage as it deems
      appropriate. In any case, the Company’s use of interest rate derivatives will be
      restricted to use for risk management purposes.




The
      Company uses variable-rate debt to finance a portion of the El Chanate Project.
      Variable-rate debt obligations expose the Company to variability in interest
      payments due to changes in interest rates. As a result of these arrangements,
      the Company will continuously monitor changes in interest rate exposures and
      evaluate hedging opportunities. The Company’s risk management policy permits it
      to use any combination of interest rate swaps, futures, options, caps and
      similar instruments, for the purpose of fixing interest rates on all or a
      portion of variable rate debt, establishing caps or maximum effective interest
      rates, or otherwise constraining interest expenses to minimize the variability
      of these effects.




The
      interest rate swap agreements are accounted for as cash flow hedges, whereby
      “effective” hedge gains or losses are initially recorded in other comprehensive
      income (“OCI”) and later reclassified to the interest expense component of
      earnings coincidently with the earnings impact of the interest expenses being
      hedged. “Ineffective” hedge results are immediately recorded in earnings also
      under interest expense. No component of hedge results will be excluded from
      the
      assessment of hedge effectiveness. The amount expected to be reclassified from
      other comprehensive income to earnings during the year ending July 31, 2009
      from
      these two swaps was determined to be immaterial.


F-35


The
      following is a reconciliation of the derivative contract regarding the Company’s
      Interest Rate Swap agreement:




(in
                thousands)Balance
                as of July 31, 2006
            
            $
            -Change
                in fair value of swap agreement
            
            
            48Interest
                expense (income)
            
            
            -Net
                cash settlements
            
            
            -Liability
                balance as of July 31, 2007
            
            $
            48Change
                in fair value of swap agreement
            
            
            141Interest
                expense (income)
            
            
            78Net
                cash settlements
            
            
            (62
            )Liability
                balance as of July 31, 2008
            
            $
            205




The
      Company is exposed to credit losses in the event of non-performance by
      counterparties to these interest rate swap agreements, but the Company does
      not
      expect any of the counterparties to fail to meet their obligations. To manage
      credit risks, the Company selects counterparties based on credit ratings, limits
      its exposure to a single counterparty under defined guidelines, and monitors
      the
      market position with each counterparty as required by
      SFAS 133.




The
      Effect of Derivative Instruments on the Statement of Financial
      Performance




(in
      thousands):




Quarter
              Ended
            
            Derivatives
                in Cash
              Flow
                Hedging
              Relationships
            
            Effective
              Results
              Recognized
              in
                OCI
            
            Location
                of Results
              Reclassifed
                from AOCI to
              Earnings
            
            Amount
              Reclassified
              from
              AOCI
                to
              Income
            
            Ineffective
              Results
              Recognized
              in
                Earnings
            
            Location
              of
              Ineffective
              Results10/31/07
            
            
            Interest Rate contracts
            
            $
            (66
            )
            
            Interest Income (Expense)
            
            
            -
            
            
            
            
            
            *N/A*1/31/08
            
            
            Interest Rate contracts
            
            $
            (201
            )
            
            Interest
                Income (Expense)
            
            
            (5
            )
            
            -
            
            
            *N/A*4/30/08
            
            
            Interest
                Rate contracts
            
            $
            28
            
            
            Interest
                Income (Expense)
            
            
            (24
            )
            
            -
            
            
            *N/A*7/31/08
            
            
            Interest
                Rate contracts
            
            $
            19
            
            
            Interest
                Income (Expense)
            
            
            (49
            )
            
            (24
            )
            
            *N/A*




Quarter
              Ended
            
            Derivatives Not
              Designated in Hedging
              Relationships
            
            Location of Results
            
            Amount of
              Gain (Loss)10/31/07
            
            
            Gold contracts
            
            
            Other Income (Expense)
            
            $
            (358
            )1/31/08
            
            
            Gold contracts
            
            
            Other Income (Expense)
            
            $
            (345
            )4/30/08
            
            
            Gold contracts
            
            
            Other Income (Expense)
            
            $
            (337
            )7/31/08
            
            
            Gold contracts
            
            
            Other Income (Expense)
            
            $
            (319
            )


F-36




Fair Value of Derivative Instruments in
      a Statement of Financial Position and
      the
      Effect of Derivative Instruments on the Statement of Financial Performance (in
      thousands):




Liability DerivativesOctober 31, 2007
            
            
            Balance Sheet Location
            
            
            Fair ValuesDerivatives designated as hedging instrumentsInterest rate derivatives
            
            
            Other Liabilities
            
            $
            115Derivatives designated as hedging instrumentsGold derivatives
            
            
            Other Liabilities
            
            $
            613January 31, 2008
            
            
            Balance Sheet Location
            
            
            Fair ValuesDerivatives designated as hedging instrumentsInterest rate derivatives
            
            
            Other Liabilities
            
            $
            313Derivatives designated as hedging instrumentsGold derivatives
            
            
            Other Liabilities
            
            $
            660April 30, 2008
            
            
            Balance Sheet Location
            
            
            Fair ValuesDerivatives designated as hedging instrumentsInterest rate derivatives
            
            
            Other Liabilities
            
            $
            274Derivatives designated as hedging instrumentsGold derivatives
            
            
            Other Liabilities
            
            $
            702July 31, 2008
            
            
            Balance Sheet Location
            
            
            Fair ValuesDerivatives designated as hedging instrumentsInterest rate derivatives
            
            
            Other Liabilities
            
            $
            205Derivatives designated as hedging instrumentsGold derivatives
            
            
            Other Liabilities
            
            $
            725





NOTE 21 – Accrued Expenses





Accrued expenses at July 31, 2008 and 2007 consists of the following:





(in thousands)July
                31,2008
            
            2007Net
                profit interest
            
            $
            753
            
            $
            -Net
                smelter return
            
            
            189
            
            
            -Mining
                contract
            
            
            193
            
            
            51Income
                tax payable
            
            
            777
            
            
            -Utilities
            
            
            110
            
            
            165Interest
            
            
            72
            
            
            100Other
                liabilities
            
            
            578
            
            
            287$
            2,672
            
            $
            603





F-37




NOTE
      22 -
      Income Taxes





The
      Company’s Income tax (expense) benefit consisted of:





(in thousands)July 31,
              2008
            
            July 31,
              2007Current:United
                States
            
            $
            -
            
            $
            -Foreign
            
            
            (2,111
            )
            
            -(2,111
            )
            
            -Deferred:United
                States
            
            
            -
            
            
            -Foreign
            
            
            (1,396
            )
            
            -(1,396
            )
            
            -Total
            
            $
            (3,507
            )
            $
            -





The
      Company’s Income (loss) from operations before income tax ** consisted
      of:





(in thousands)July 31,
              2008
            
            July 31,
              2007United
                States
            
            $
            (6,556
            )
            $
            (5,514
            )Foreign
            
            
            16,427
            
            
            (1,958
            )Total
            
            $
            9,871
            
            $
            (7,472
            )





The
      Company’s income tax expense differed from the amounts computed by applying the
      United States statutory corporate income tax rate for the following reasons:





(in thousands)July 31,
              2008
            
            July 31,
              2007Income
                (loss) from operations before income tax
            
            $
            9,871
            
            $
            (7,472
            )US
                statutory corporate income tax rate
            
            
            34
            %
            
            34
            %Income
                tax (expense) benefit computed at US statutory corporate income tax
                rate
            
            
            (3,356
            )
            
            2,540Reconciling
                items:Change
                in valuation allowance on deferred tax assets
            
            
            (1,137
            )
            
            (2,540
            )Difference
                in foreign tax
            
            
            986
            
            
            -Income
                tax expense
            
            $
            (3,507
            )
            $
            -


F-38




Components
      of the Company’s deferred income tax assets (liabilities) are as follows:





(in thousands)July 31,
              2008
            
            July 31,
              2007Net deferred
                income tax assets, non current:Remediation
                and reclamation costs
            
            $
            (29
            )
            $
            -Net
                operating losses
            
            
            9,334
            
            
            8,197Depreciation
                and amortization
            
            
            602
            
            
            -$
            9,907
            
            $
            8,197Valuation
                allowances
            
            
            (9,334
            )
            
            (8,197
            )$
            573
            
            $
            -Net
                deferred income tax liabilities, current:Depreciation
                and amortization
            
            $
            12
            
            $
            -Foreign
                currency exchange
            
            
            2Inventory
                valuation
            
            
            (1,925
            )Accounts
                receivable
            
            
            (413
            )Other
            
            
            261
            
            
            -$
            (2,063
            )
            $
            -





The
      Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
      Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
      of FIN 48 is to clarify and set forth consistent rules for accounting for
      uncertain tax positions in accordance with Statement of Financial Accounting
      Standards No. 109, "Accounting for Income Taxes". The cumulative effect of
      applying the provisions of this interpretation are required to be reported
      separately as an adjustment to the opening balance of retained earnings in
      the
      year of adoption. The adoption of this standard did not have an impact on the
      financial condition or the results of the Company’s operations.




On
      October 1, 2007, the Mexican Government enacted legislation which introduces
      certain tax reforms as well as a new minimum flat tax system.  This new
      flat tax system integrates with the regular income tax system and is based
      on
      cash-basis net income that includes only certain receipts and
      expenditures.  The flat tax is set at 17.5% of cash-basis net income as
      determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
      respectively.  If the flat tax is positive, it is reduced by the regular
      income tax and any excess is paid as a supplement to the regular income
      tax.  If the flat tax is negative, it may serve to reduce the regular
      income tax payable in that year or can be carried forward for a period of up
      to
      ten years to reduce any future flat tax.




Companies
      are required to prepay income taxes on a monthly basis based on the greater
      of
      the flat tax or regular income tax as calculated for each monthly period. 
Annualized income projections indicate that the Company will not be liable
      for
      any excess flat tax for calendar year 2008 and, accordingly, has recorded a
      Mexican income tax provision as of July 31, 2008.




As
      the
      new legislation was recently enacted, it remains subject to ongoing varying
      interpretations.  There is the possibility of implementation amendments by
      the Mexican Government and the estimated future income tax liability recorded
      at
      the balance sheet date may change.





Deferred
      income tax assets and liabilities are determined based on differences between
      the financial statement reporting and tax bases of assets and liabilities and
      are measured using the enacted tax rates and laws in effect when the differences
      are expected to reverse. The measurement of deferred income tax assets is
      reduced, if necessary, by a valuation allowance for any tax benefits, which
      are,
      on a more likely than not basis, not expected to be realized. The effect on
      deferred income tax assets and liabilities of a change in tax rates is
      recognized in the period that such tax rate changes are enacted.




F-39




For
      income tax purposes in the United States, the Company had available net
      operating loss carryforwards ("NOL") as of July 31, 2008 and 2007 of
      approximately $22,179 and $17,464, respectively to reduce future federal taxable
      income. If any of the NOL's are not utilized, they will expire at various dates
      through 2027. There may be certain limitations as to the future annual use
      of
      the NOLs due to certain changes in the Company's ownership.




NOTE
      23 -
      Commitments and Contingencies





Lease
      Commitments





The
      Company occupies office space in New York City under a non-cancelable operating
      lease that commenced on September 1, 2007 and terminates on August 31, 2012.
      In
      addition to base rent, the lease calls for payment of utilities and other
      occupancy costs.





Approximate
      future minimum payments under this lease are as follows (in
      thousands):





Fiscal
                Years Ending July 31,2009
            
            $
            1322010
            
            
            1422011
            
            
            1472012
            
            
            1512013
            
            
            13$
            585





Rent
      expense was approximately $107 and $66 for the years ended July 31, 2008 and
      2007, respectively.





Land
      Easement





On
      May
      25, 2005, MSR entered into an agreement for an irrevocable access easement
      and
      an irrevocable fluids (electricity, gas, water and others) easement to land
      located at Altar, Sonora, Mexico. The term of the agreement is five years,
      extendable for 1-year additional terms, upon MSR’s request. The agreement would
      be suspended only by force majeure or Acts of God; and extendable for the
      duration of the suspension. In consideration for these easements, $18,000 was
      paid upon the signing of the agreement and yearly advance payments equal to
      two
      annualized general minimum wages (365 X 2 general minimum wages) in force in
      Altar, Sonora, Mexico, are required. These yearly payments are to be made on
      September 1 of each year, using the minimum wage in effect on that day for
      the
      calculation of the amount payable. These payments are to be made for as long
      as
      the construction and production mining works and activities of MSR are being
      carried out, and are to cease as soon as such works and activities are
      permanently stopped.




El
      Charro





In
      May
      2005, the Company acquired rights to the El Charro concession for approximately
      $20,000 and a royalty of 1.5% of net smelter return. The Company acquired the
      El
      Charro concession because it is surrounded entirely by the Company’s other
      concessions. ****


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NOTE
      24 –
Unaudited Supplementary Data




The
      following is a summary of selected fiscal quarterly financial information
      (unaudited and 000’s except per share data and share price):





**2008****Three Months Ended****October 31**
            
            **January 31**
            
            **April 30**
            
            **July 31**Revenues
            
            $
            6,526
            
            $
            8,043
            
            $
            8,730
            
            $
            9,805Costs
                applicable to sales
            
            $
            2,204
            
            $
            2,419
            
            $
            2,717
            
            $
            3,350Net
                income applicable to common shares
            
            $
            1,747
            
            $
            2,126
            
            $
            2,740
            
            $
            (249
            )Net
                income per common share, basic
            
            $
            0.01
            
            $
            0.01
            
            $
            0.02
            
            $
            0.00Net
                income per common share, diluted
            
            $
            0.01
            
            $
            0.01
            
            $
            0.01
            
            $
            0.00Basic
                weighted-average shares outstanding
            
            
            170,855
            
            
            174,765
            
            
            175,645
            
            
            175,040Diluted
                weighted-average shares outstanding
            
            
            192,998
            
            
            196,191
            
            
            197,239
            
            
            195,469Closing
                price of common stock
            
            $
            0.63
            
            $
            0.70
            
            $
            0.65
            
            $
            0.65





**2007****Three Months Ended****October 31**
            
            **January 31**
            
            **April 30**
            
            **July 31**Revenues
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Costs
                applicable to sales
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Net
                loss applicable to common shares
            
            $
            (1,161
            )
            $
            (1,673
            )
            $
            (2,649
            )
            $
            (1,989
            )Net
                loss per common share, basic
            
            $
            (0.01
            )
            $
            (0.01
            )
            $
            (0.02
            )
            $
            (0.01
            )Net
                income loss per common share, diluted(1)
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Basic
                weighted-average shares outstanding
            
            
            132,598
            
            
            138,074
            
            
            164,582
            
            
            149,811Diluted
                weighted-average shares outstanding(1)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Closing
                price of common stock
            
            $
            0.31
            
            $
            0.40
            
            $
            0.41
            
            $
            0.44





(1)  Net
      loss
      per common share, diluted and computation of diluted weighted average common
      shares was not included as their effect would have been
      anti-dilutive.





NOTE
      25 –
Subsequent Events





On
      September 18, 2008, the Company closed its Amended And Restated Credit Agreement
      involving our wholly-owned Mexican subsidiaries MSR and Oro, as Borrowers,
      the
      Company, as guarantor, and Standard Bank PLC (“Standard Bank”), as the lender.
      The Company made its first principal payment of $1,125 on September 30,
      2008.





In
      September 2008, our Board of Directors (the "Board") approved and recommended
      to
      our stockholders a proposal to effect a reverse stock split of all outstanding
      shares of our Common Stock in an amount which our Board of Directors deems
      appropriate to result in a sustained per share market price above $2.00 per
      share, to be at a ratio of not less than one-for-four and not more than
      one-for-six (the "Reverse Stock Split"). In conjunction with the Reverse Stock
      Split, our Board has approved and is recommending to our stockholders a proposal
      to effect a reduction in the number of shares of Common Stock authorized for
      issuance and an increase in the par value thereof in proportion to the Reverse
      Stock Split. We will not issue fractional shares in connection with the Reverse
      Stock Split. Any fractional shares that result from the Reverse Stock Split
      will
      be rounded up to the next whole share. However, if the Board determines that
      effecting these capitalization changes would not be in the best interests of
      our
      stockholders, the Board can determine not to effect any or all of the changes.




F-41




These
      changes, if authorized by the stockholders at the Meeting and if subsequently
      implemented by our Board of Directors, will be effected by the filing of an
      Amendment to our Certificate of Incorporation.





On
      August
      11, 2008, Jeffrey Pritchard was appointed our Executive Vice
      President.





On
      October 28, 2008, we entered into an Engagement Agreement with John Brownlie,
      our Chief Operating Officer. The agreement supersedes a May 12, 2006 employment
      agreement between us and Mr. Brownlie. Pursuant to the Engagement Agreement,
      Mr.
      Brownlie serves as our Chief Operating Officer and receives a base annual fee
      of
      at least $258,750 and is entitled to annual bonuses. The Engagement Agreement
      runs through August 31, 2009, and automatically renews thereafter for additional
      one year periods unless terminated by either party within 30 days of a renewal
      date. We can terminate the agreement for cause or upon 30 days notice without
      cause. Mr. Brownlie can terminate the agreement upon 60 days notice without
      cause or, if there is a breach of the agreement by us that is not timely cured,
      upon 30 days notice. In the event that we terminate him without cause or he
      terminates due to our breach, he will be entitled to certain severance payments.
      We previously entered into a change of control agreement with Mr. Brownlie
      similar to the agreements entered into with our other executive officers.


F-42